Wells Fargo Cooperation in Ponzi Scheme Class Action

Banks are required to follow Know Your Customer rules and to know enough about its customers’ businesses to recognize whether their transactions are reasonable for their purposes or possibly fraudulent. The complaint for this class action alleges Wells Fargo Bank, NA did not give sufficient scrutiny to customers Johanna Garcia and her companies MJ Capital and MJ Taxes, allowing her to run an illegal Ponzi scheme.

The class for this action is all persons who invested in the MJ companies and suffered damages.

Garcia and the MJ companies raised money purportedly for making small business loans called merchant cash advances (MCAs). Beginning in around June 2020, they raised somewhere between $70 and $120 million from investors that would supposedly be lent out in MCAs and paid back out of the merchants’ repayments. The investors were told they’d receive monthly returns of around 10% (or around 120% in the course of a year) along with the eventual return of their principal.

However, investors never received payments from loans. “Instead…” the complaint claims, “Garcia steered investor funds to pay returns to other investors, made cash withdrawals on investor funds, and misspent investor funds on sales agent commissions and loan repayment benefitting MJ Taxes.” Only around $3 million or less went to make MCA loans.

According to the complaint, Wells Fargo was the primary bank for the Ponzi scheme. The complaint charges, “Wells Fargo’s actions and inaction were integral to Garcia’s scheme to defraud investors.”

Banks are required to “know their customers” and, the complaint says, to operate a due diligence plan “to predict the types of transactions, dollar volume and transaction volume each customer is likely to conduct, thereby providing the bank with a means of identifying unusual or suspicious transactions for each customer.” When a customer shows signs of suspicious transactions, a bank is supposed to report this and investigate.

According to the complaint, Wells Fargo knew that the MJ company accounts received investor funds, was supposed to use them to make MCAs, and was supposed to use repayments to pay investors. The complaint claims that what it saw instead was “a great deal of investor money entering the MJ Companies’ accounts—and an array of other banking activities blatantly at odds with the MJ Companies’ claimed business model.”

The complaint says it also knew that there was comingling of funds between MJ Capital and MJ Taxes—something it calls “a hallmark of a Ponzi scheme…”

According to the complaint, “Despite … unambiguous signs of an illicit enterprise, Wells Fargo failed to timely act upon the accounts connected with Garcia and MJ Companies. Wells Fargo continued to accept deposits of investor money and carry out the transfers needed to consummate the fraud.”

In August 2021, the Securities and Exchange Commission filed a civil complaint against Garcia and the MJ companies alleging that the companies’ “business model was a sham.”

Article Type: Lawsuit
Topic: Fraud
Tags: Aiding and Abetting Fraud, Breach of Fiduciary Duty, Unjust Enrichment