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Aiding and abetting occurs when a person or entity helps another person or entity commit a prohibited act. Unlike conspiracy, which requires an agreement, an aider and abettor can be liable for simply providing assistance. With the proliferation of Ponzi schemes and other financial frauds in the market run up following the recession of 2008, courts in Minnesota and elsewhere have ruled on the issue of when and under what circumstances third parties may be liable for aiding and abetting the fraudsters. Minnesota federal district court rulings and a recent Eighth Circuit decision demonstrate the heavy burden faced by a plaintiff pursuing aiding and abetting claims in the absence of direct evidence of knowing participation in the wrongdoing.
Under Minnesota law, a plaintiff must show three things to hold a defendant liable for aiding and abetting a tort: first “the primary tortfeasor must commit a tort that causes an injury to the plaintiff,” second, “the defendant must know that the primary tortfeasor’s conduct constitutes a breach of duty,” and third “the defendant must substantially assist or encourage the primary tortfeasor in the achievement of the breach.” Zayed v. Associated Bank, N.A. (“Zayed I”), 779 F.3d 727, 733 (8th Cir. 2015) (quoting Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 187 (Minn. 1999)).
A defendant’s “knowledge that the primary tortfeasor’s conduct constitutes a breach of . . . duty is a ‘crucial element’ of a claim for aiding and abetting.” In re Petters Co., Inc., 565 B. R. 154, 167 (Bankr. D. Minn. 2017 (citing Varga v. U.S. Bank Nat’l Ass’n, 764 F.3d 833, 839 (8th. Cir. 2014). In Minnesota, the scienter (i.e., knowledge) requirement for aiding and abetting is “actual knowledge.” Varga v. U.S. Bank Nat. Ass’n, 952 F. Supp.2d 850, 857 (D. Minn. 2013), aff’d, 764 F.3d 833 (8th Cir. 2014) (applying Minnesota law). While knowledge may be shown by circumstantial evidence, Minnesota courts have stressed that the evidence must show that aider and abettor “actually knew” of the “wrongfulness” of the underlying tortious conduct. Id. at 857-858 (quoting Wiand v. Wells Fargo Bank, N.A., 938 F. Supp.2d 1238, 1244 (M.D. Fla. 2013) and citing Camp v. Dema, 948 F.2d 455, 459 (8th Cir. 1991)).
The Eighth Circuit’s recent decision in Zayed v. Associated Bank, N.A (“Zayed II”), 913 F.3d 709 (8th Cir. 2019) sheds light on the steep burden to prove aiding and abetting liability with a circumstantial case. There, the Court held that there was insufficient evidence from which a court could reasonably infer (absent considerable conjecture and speculation) that a third-party, a bank at which the fraudsters held bank accounts, both knew about and substantially assisted in the fraud scheme.
By way of background, from 2006 to 2009, five individuals perpetrated a Ponzi scheme that took in over $193 million from investors and returned only $49 million (all from new investors’ money). See United States v. Beckman, 787 F.3d 466,474 (8th Cir. 2015) (discussing the scheme in an appeal from some of the fraudsters’ criminal convictions). When the fraud was uncovered in 2009, federal regulators filed civil actions against the scammers and the entities through which they perpetrated the fraud. In those civil actions, the district court appointed a Receiver to take control over the fraudsters’ entities and to investigate and potentially bring legal actions in discharge of the Receiver’s duties.
In 2013, the Receiver filed suit against Associated Bank for allegedly aiding and abetting various torts committed by the fraudsters. The allegations centered on one former bank employee who helped open bank accounts for the scammers and then serviced those accounts at the bank. The Receiver contended that the bank employee knew about and assisted in the fraud scheme.
Later that year, the district court granted the bank’s motion to dismiss, concluding that the Receiver had not sufficiently pled a plausible claim that the bank aided and abetted the scammers’ tortious conduct. 2013 WL 5487542. On appeal, the Eighth Circuit reversed the district court’s dismissal, concluding the Receiver’s pleadings were sufficient to survive a motion to dismiss. See Zayed I, 779 F.3d 727, 737 (8th Cir. 2015).
After remand and discovery, Associated Bank moved for summary judgment. The district court granted the motion, concluding there was insufficient evidence to hold the bank liable for aiding and abetting the scammers’ tortious conduct. On appeal, the Receiver’s case against the bank hinged on whether the bank knew the scammers were engaged in tortious conduct and substantially assisted the scammers in achieving that scheme.
Central to the Eighth Circuit’s decision affirming the district court’s grant of summary judgment was that despite fulsome discovery (described by the Court as a twenty-seven volume, six-thousand page record) there was no direct evidence that anyone at the bank knew of the Ponzi scheme and, in fact, all of the direct evidence was to the contrary. Zayed II, 913 F.3d at 715. In the absence of direct evidence, the Receiver sought to marshal circumstantial evidence showing the bank employee had actual knowledge of the Ponzi scheme. But, as described by the Court, the Receiver’s circumstantial evidence pointed to no more than “sloppy banking” or “red flags” that only “with the benefit of hindsight should have prompted further investigation of inquiry.” Id. at 716. Further, the Court ruled the same circumstantial evidence as insufficient for any reasonable fact finder to conclude the bank provided substantial assistance to the fraudsters in the commission of their torts. Id. at 719.
The takeaway here is that while aiding and abetting claims have some appeal in theory and are not difficult to plead, in practice they are oftentimes much harder to prove.
A trial lawyer with the business litigation firm of Anthony Ostlund Baer & Louwagie in Minneapolis, Minnesota, Steve Phillips has decades of experience litigating a financial fraud disputes, both in court and in arbitration. In addition, he litigates a wide variety of business disputes and regularly represents employers and employees in disputes over noncompetition and non-solicitation agreements and other restrictive employment covenants. Visit www.anthonyostlund.com or email firstname.lastname@example.org for more information.