Third Circuit Requires Plaintiffs To Prove Causal Link And Breach Of Duty In Deepening Insolvency Cases

Originally published January 2010

Earlier this month in Marion v. TDI, Inc., the Court of Appeals for the Third Circuit overturned a $32.7 million jury verdict against defendants accused of deepening the insolvency of Bentley Financial Services ("BFS") by giving it access to more cash and investors. The suit was brought by the receiver for BFS, a Pennsylvania corporation, after BFS's chief officer used the corporation to run a Ponzi scheme for five years, defrauding more than 200 investors and causing $375 million in losses. The receiver claimed that the defendants, together with BFS's chief officer, had harmed the corporation by saddling it with additional liability to victims of the scheme.

Robert Bentley formed BFS in 1986 to broker bank-issued certificates of deposit (CDs). Bentley also later formed Entrust Group, a Pennsylvania sole proprietorship to act as custodian on BFS-brokered transactions. As the Third Circuit explained in its opinion, "[i]n the CD-selling industry, the broker is responsible for connecting CDs available for purchase from banks with particular investors. The custodian then collects the money from each investor, wires it to the issuing bank and holds onto the CD, while issuing a 'safekeeping receipt' to the investor indicating that it has title to the CD held by the custodian." The CD seller's profit comes from the difference between the terms of the CD purchased from the bank and the terms on which the CD is sold to the investor. A CD seller also can profit by mismatching maturity dates — for example, by locking in an interest rate for a long-term CD, but then selling it as a series of short-term CDs in the hope of profiting on the difference in the interest rate between the rate for the short-term CDs and the long-term rate the broker locked in. This is a legal, but risky, practice as long as the mismatch is disclosed to the investor (including the fact that the investor may not be able to reclaim its principal at the maturity date stated in the investment contract).

The Ponzi scheme began in 1996, when Bentley's bank learned that he had forged his accountant's signature in a letter certifying collateral that secured a $2 million credit line for cash flow management. The bank called the balance on the credit line, thus threatening Bentley's business. To repay the loan, Bentley created and sold fictitious CDs — a scheme he was able to perpetuate because he was his own custodian and issued bogus safekeeping...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT