Bankruptcy judge orders trial for BMO Harris Bank in Tom Petters case

A U.S. bankruptcy judge ordered sanctions and a jury trial for BMO Harris Bank on claims it destroyed e-mails and bank tapes related to Tom Petters' massive 2008 Ponzi scheme in a deliberate effort to hide the bank's involvement.

In a stinging 44-page opinion Monday, U.S. Bankruptcy Judge Kathleen Sanberg concluded BMO Harris Bank lied, gave the court "false and misleading" testimony and "intentionally destroyed and failed to preserve the Minnesota e-mail backup tapes in bad faith to deprive the plaintiff of their use in this adversary proceeding."

Sanberg on Tuesday ordered that the case be sent to the U.S. District Court, where a civil jury trial is expected to begin before the end of the year.

Patrick O'Herlihy, a spokesman for BMO Harris, said the bank strongly disagreed with the court's findings and order.

"We are considering all options at our disposal," O'Herlihy said in a statement.

Tom Petters, the former Wayzata businessman, is serving a 50-year prison sentence for an elaborate $3.5 billion Ponzi scheme that defrauded hundreds in Minnesota and beyond.

Doug Kelley, the bankruptcy trustee handling the liquidation of the Petters Co. Inc., said he is seeking $1.92 billion in losses from BMO Harris for its alleged role in the Ponzi scheme. With interest and penalties, total losses could jump to $3.5 billion, he said.

Kelley called Sanberg's ruling rare and powerful and said he looks forward to having the case before a jury.

Kelley first filed an adversary proceeding accusing Marshall and Ilsley Bank (M&I) — and its successor, Chicago-based BMO Harris Bank — of aiding and abetting Tom Petters' fraud in November 2012.

In more recent court filings, Kelley accused BMO Harris of violating the Minnesota Uniform Fiduciaries Act and of destroying 66 e-mails and backup tapes showing details of Petters' banking activities.

Kelley alleged that Petters' scheme was aided by the bank and that without M&I/BMO's actions, authorities would have unearthed the massive fraud much sooner than 2008, after Petters' former lover and company executive disclosed the fraud to authorities.

This week, the court agreed that the bank's actions were harmful.

Sanberg ordered that a jury must be told that BMO Harris Bank deliberately destroyed evidence in the bankruptcy case.

Sanberg's ruling said the bank and its legal counsel engaged in "deceit and obfuscation" in connection with destroying scores of highly sought-after bank e-mail tapes. The tapes contained the bank's only documents tracing Petters' banking activities dating back to March 2005. That is a period during which the bank dealt significantly with Petters and his company, court documents said.

BMO Harris Bank, the ruling said, knew it had a duty to preserve Petters' banking tapes but "failed to take reasonable steps to prevent the destruction — first in 2010 and 2011 and again in 2014 when the tapes were either lost or destroyed.

The information on the backup tapes cannot be restored or replaced through additional discovery."

Kelley said any rational examination of the money going into and out of Petters' bank accounts would have immediately signaled that some form of money laundering was taking place. He said BMO Harris failed to file warning notices to federal authorities as required by law.

Said O'Herlihy of BMO Harris: "We note that the fraud perpetrated by Petters occurred well before BMO acquired M&I in 2011."

This is not BMO Harris Bank's only legal trouble in connection with Petters.

In July 2015, BMO Harris Bank agreed to pay $16 million to two Florida hedge funds for the bank's role as a financial conduit in Petters' Ponzi scheme.

That agreement, filed in U.S. Bankruptcy Court in West Palm Beach, covered allegations of complicity by M&I Bank before it was acquired by BMO Harris in 2011. In his lawsuit, hedge-fund trustee Barry Mukamal accused M&I Bank in Edina of failing to notify authorities when Petters moved more than $37 billion in and out of accounts there.

Dee DePass • 612-673-7725