Ponzi scheme: The Dutch Supreme Court on the special duty of care of banks towards third parties
On 27 November 2015 the Dutch Supreme Court delivered its judgment in an interesting case concerning a Ponzi scheme. It ruled that the bank where the swindler held his accounts had a special duty of care towards the investors, who were third parties.
The Italian American Charles Ponzi (1882-1949) became famous for his ingenious way of supposedly providing investment services and making good money out of it. The ‘trick’ was to promise investors a very high return and then, instead of actually investing their money, paying out using the incoming funds contributed by subsequent investors. Although this ‘Ponzi scheme’ was named after Charles Ponzi, this fraudulent activity has a longer history. Montague Tipp, a character in Dickens’ novel Martin Chuzzlewit (1844) already ran a similar scheme.
Recently, a Ponzi scheme again became world news through the fraudulent activities of Bernard Madoff. Our small country has also produced a similar swindler: Mr. Van den Berg. In 2006 a Dutch court sentenced Van den Berg to a term of imprisonment of five years for (among other things) committing fraud.
Van den Berg, who did not have a licence to provide investment services, received money from around 1,440 investors. In the beginning, he did actually invest the investors’ money, but later on he ran the (for him) profitable Ponzi scheme. The investors suffered severe losses.
Apart from Van den Berg and the subsequently aggrieved investors, another party at the scene was Fortis Bank (now ABN AMRO Bank), the bank where Van den Berg held two accounts on which he received most of the payments from the investors. A foundation which represents the interests of the aggrieved investors (Stichting Belangenbehartiging Gedupeerde Beleggers Van den Berg) took legal action against the bank. The key question in this recent case, which came to trial before the Dutch Supreme Court (HR 27 November 2015, ECLI:NL:HR:2015:3399),was whether the bank had acted wrongfully towards the investors by breaching its duty of care.
The Dutch Supreme Court has held in the past that due to their function in society, banks have a special duty of care not only towards their clients, but also – under certain circumstances – towards third parties (HR 23 December 2005, ECLI:NL:HR:2005:AU3713, Safe Haven). In the case of 27 November 2015, the Supreme Court ruled that the duty of care also entails that the bank should have protected the investors as third parties against their own rashness and lack of skill. The ‘specific’ circumstances in this case are i.a. that Van den Berg was a private account holder and that there was an unusual number of transactions on his account.
A breach of the special duty of care towards third parties is not often assumed by the Dutch Supreme Court. This makes the case, particularly in view of the specific facts concerning the Ponzi scheme, exceptional and interesting.