Note: In soliciting investments, the owners, directors, and officers (Owners) of now defunct HMO, Quality Health Plans, Inc. (Company) provided financial statements to Vicis Capital Master Fund (Investor) through Company entities that falsely represented Company's true financial state of affairs, masking extreme capital deficiencies that threatened their continued operation and existence. Investor invested USD 30 million over the course of 18 months, relying on representations made in the 2007, 2008, 2009 and 2010 financial statements.

As trustee for and on behalf of Investor, Caledonian Bank & Trust Ltd. (Trustee) sued Fifth Third Bank (Bank) for aiding and abetting fraud and civil conspiracy to commit fraud. Bank moved to dismiss both claims of aiding and abetting fraud and civil conspiracy to commit fraud. The U.S. District Court for the Middle District of Florida, Tampa Division, Moody, J., denied the motion.

Investor alleged Bank provided substantial assistance to aid Owners of Company and its entities in their attempts to defraud regulators and the public about the financial health of Company by issuing two sham loans in amounts USD 8.5 million and USD 6.7 million, while all loan proceeds remained in secured, restricted accounts belonging to Bank. Bank also issued an LC for USD 3 million on behalf of Company, but did not actually extend credit as Bank required Company to maintain USD 3 million in securities in another account controlled by Bank for the duration of the LC. Investor alleged that Bank knew that Company had to show minimum capital to operate in Florida, and that Owners and Company Entities would report the phantom capital from the sham loans and sham letter of credit on Company's financial statements.

Investor became aware of the spurious transactions and LC during discovery on a related case against Owners. The specific allegations in this case are that:

[Bank] incurred no credit risk in making the loans and issuing the letter of credit; [Bank] made the loans knowing that they served no legitimate business purpose; [Bank] took a prohibited senior lien in the [Bank] controlled account in which [Company] held the securities which secured the line of credit; the loans and the letter of credit were shams; and [Bank] knowingly made the sham loans and issued the sham letter of credit to assist the [Owners] and [Company] Entities in defrauding regulators and the investing public by providing phantom capital for [Company] to report on its financial statements.

Bank argued that aiding and abetting fraud was not a recognized cause of action under Florida law. However, examining Florida case history, the Judge noted that courts considering the sufficiency of such claims have assumed existence of the cause of action and set forth the elements required. Bank argued further that if aiding and abetting fraud is a recognized cause of action in Florida, Investor failed to plead elements to sustain it. The Judge disagreed, noting virtually universal agreement of courts in requiring a plaintiff to establish: underlying fraud, defendant's knowledge of underlying fraud, and that defendant provided "substantial assistance" to advance commission of fraud. Investor pled sufficient allegations to support each element of the claim.

Bank made similar arguments of failure to plead facts sufficient to state a claim and failure to comply with the heightened pleading standard for a claim of civil conspiracy to commit fraud. Disagreeing, the Judge clarified that to plead civil conspiracy; plaintiff must "allege proof of an agreement between two or more people to achieve an illegal objective, an overt act in furtherance of that illegal objective, and a resulting injury to plaintiff." He concluded that the amended complaint alleged all required elements with sufficient detail to support claims and survive a motion to dismiss.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.