Huntington ordered to pay 81M in Cyberco damages

July 29, 2012
| By Pete Daly |
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Huntington Bank has announced there will be a federal district court review of a bankruptcy judge’s decision that the bank should pay damages of $72.7 million — plus $9 million in interest — to victims of the Cyberco/Teleservices Ponzi scheme that blew up in 2004.

Cyberco (also referred to as Cybernet) and its sister company, Teleservices Group, were founded by convicted felon Barton Watson, who committed suicide at his Ada home when the FBI raided his IT companies’ Grand Rapids facility, revealing that many of his client servers were fake. Watson’s companies fleeced tens of millions of dollars from finance companies over several years.

Court trustees handling the subsequent Cyberco/Teleservices bankruptcies sued Huntington in 2006 and 2007, alleging the bank continued to extend credit to Cyberco despite the presence of “red flags” indicating fraud. According to the Grand Rapids law firm of Mika Meyers Beckett & Jones, the bankruptcy trustees claimed Huntington’s actions propped up the Ponzi scheme at Cyberco, which would have collapsed by 2003 or early 2004, saving many finance companies from subsequent losses of millions of dollars.

In March 2011, Bankruptcy Judge Jeffrey Hughes ruled that Huntington was “willfully blind” to mounting evidence of fraud at Cyberco. The suits contended that the bank rushed to get its own loans to Cyberco repaid less than a month before the FBI raid in November 2004. The allegation is that Huntington then continued some financing to Cyberco as Watson’s companies took out loans from other financial institutions.

Hughes ordered Huntington in March to pay $72.7 million in damages to the bankruptcy trustees for reimbursement to finance companies victimized by Cyberco/Teleservices. Last week he added $9 million in interest.

“This case was about a bank that deliberately chose not to investigate many red flags of fraud by a customer engaged in money laundering. We are pleased that the victims of this huge fraud may sometime soon recover at least a substantial portion of their losses,” said attorney Douglas A. Donnell at Mika Meyers Beckett & Jones.

That money might not be forthcoming immediately, however.

“While we are still evaluating the opinion that was rendered on July 23, 2012, concerning this complex case, we can tell you that Huntington has vigorously contested the claims of this case since its inception and expects to continue to do so,” said Matthew Samson, a senior vice president at Huntington National Bank corporate headquarters in Columbus, Ohio.

“We believe we took appropriate action and that the bankruptcy court’s opinions have gone beyond legal precedent,” added Samson.

“The bankruptcy court’s opinions will not result in a judgment being entered at this time and will be a recommendation to the federal district court, who will conduct an independent review of the factual findings and legal conclusions of the bankruptcy court,” said Samson, who declined to comment further because it is “ongoing litigation.”

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