Magazine article American Banker

Bank Can Only Blame Itself for Check Scam, Appeals Court Rules

Magazine article American Banker

Bank Can Only Blame Itself for Check Scam, Appeals Court Rules

Article excerpt

Bank Can Only Blame Itself For Check Scam, Appeals Court Rules

NEW YORK -- A federal appeals court has absolved the Federal Reserve Bank of New York from responsibility for a $880,000 check scame perpetrated on a Maryland bank.

In a brief four-page decision last week, a unanimous three-judge panel of the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of the suit by a lower court. The appellate court found that the reasoning of U.S. District Judge Charles S. Haight Jr. in throwing out the case was "persuasive" without further amplification.

Judge Haight last October found that the Union Trust Company of Maryland was primarily responsible for the loss. Union Trust's insurer, U.S. Fidelity and Guaranty Company, was also a plaintiff in the suit.

"In the banking system, the depository bank is the first line of defense against ... fraud," Judge Haight said, "and the most efficient point at which to take precautions against it."

The case stems from a check fraud perpetrated on Union Trust by a man calling himself Marvin Goldstein, who deposited a check for $880,000 in his business checking account on May 6, 1980.

The account upon which the check was purportedly drawn did not exist but" clever manipulation" of the numerals on the face of the check caused it to be routed among a number of New York and Pennsylvania banks before being returned to Union Trust as uncollectible. In the meantime, Union Trust permitted Mr. goldstein to withdraw nearly the full amount of the check in cash after having assumed from the lapse of time that the check had been honored.

Judge Haight noted that the "interesting details unearthed" during discovery in the case primarily concerns not the behavior of the defendants in routing the bogus checks but that of Union Trust's employees in accepting it and releasing funds against it.

"Deposits of such large checks ordinarily trigger self-protective internal alerts at a bank," Judge Haight said, "and Union Trust was no exception."

The teller who accepted Mr. Goldsteins checks, however, neither notified bank officers of the large deposit nor placed an additional hold on it as required by the bank's own rules. The only hold was a two-day Federal Reserve hold on the check.

"The teller, however, was merely the bank's first line of defense against fraud," the ruling continued.

During the next few days, the branch manager reviewing the balance fluctuation report noticed the leap in Mr. Goldstein's account balance, and decided to investigate.

Two national credit reporting services informed the bank that there was no record of Mr. …

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