Custodial Bank Is Not Liable to Investors Defrauded by Their Investment Advisor

Article excerpt

In Lamm v. State Street Bank and Trust, (1) a custodial bank, State Street Bank and Trust, was declared not liable to investors who had been defrauded by their investment advisor.

The court ruled that the bank had not violated a duty it owed to its customer-investors by accepting securities that turned out to be fake and listing those fraudulent securities in monthly account statements it sent to its customer-investors.

Douglas Lamm was one such customer-investor. He signed up with Taurus Advisory Group LLC as his investment advisor, creating two separate custodial accounts: one for his individual investments and one for his IRA investments. He granted Taurus wide latitude in investing the funds in each account.

Taurus moved its operations to the Virgin Islands and proceeded to invest Lamm's money in risky and speculative stocks of micro-cap companies, notes purportedly issued by those companies, and personal loans and mortgages. In the process, State Street accepted pieces of paper purporting to be bona fide promissory notes and listed them on monthly statements it sent to Lamm.

After a few years, State Street sent Lamm a letter warning him it could not obtain updated valuations for certain "illiquid, thinly traded or private placement securities" and was showing them as without value on the monthly statements. Ultimately, all of the purported promissory notes were worthless and Lamm lost over $1,000,000.

Lamm sued State Street on a variety of legal theories asserting that the bank had a duty to notify him that the promissory notes were valueless. Lamm asserted that the bank 1) allowed his money to be used to purchase fake notes; 2) failed to advise him that certain securities were signed by Taurus rather than the "real" issuer; 3) failed to advise him that some of the notes were made payable to Hunter & Co., a company with the same address as Taurus; 4) disbursed cash from the accounts without a timely delivery of any security; 5) listed fake CUSIP numbers on monthly statements; 6) issued monthly statements with inflated or false market values; 7) charged excessive fees based on false market values; and 8) failed to disclose the fraud perpetrated by Taurus. …