USA Law and Practice Contributed by: Steven Molo, Robert Kry, Megan Cunniff Church and Walter Hawes, MoloLamken
ceed, and that action proximately causes the harm alleged. Providing routine business ser - vices for an alleged fraudster ordinarily does not constitute substantial assistance. Examples In one case, the plaintiff, a business investor, sued a bank that allowed its customer to deposit USD750,000 he stole from the plaintiff. The cus - tomer defrauded the plaintiff in a scheme involv - ing the deposit of funds into an escrow account at the bank, which the customer claimed would be used to secure loans from other banking institutions and underwriters. The bank’s vice- president allowed the customer to name the account an escrow account even though the procedures for setting up an escrow account were not followed. The vice-president wrote a letter on the bank’s letterhead, falsely inflating the account balance. The customer also paid the vice-president USD100,000 for his assis - tance. Under these facts, the court found that the bank’s inaction was sufficient to show “sub- stantial assistance” to state a claim for aiding and abetting fraud because banks have a duty to safeguard deposited funds when confronted with clear evidence that those funds are being mishandled. In another instance, a court found that the plain - tiff failed to state a claim for aiding and abet - ting fraud where a bank allowed its customer, the perpetrator of a Ponzi scheme, to transfer funds between various accounts. The court held that allowing a customer to transfer funds was a routine business service and not “substantial assistance” . 1.4 Limitation Periods Each state in the United States has its own stat - ute of limitations for fraud, ranging anywhere from two to six years. Under New York law, an
action for fraud must be commenced either with - in six years of the date of the alleged fraud, or within two years of the date the plaintiff discov - ered the fraud or could with reasonable diligence have discovered it. Federal law also imposes limitation periods that vary by statute. For example, the Securities Exchange Act of 1934 (15 USC Sections 78a et seq) requires that an action be brought two years after the discovery of the fraud, or five years after the fraud occurred, whichever is earlier. 1.5 Proprietary Claims Against Property In general, a plaintiff who obtains a judgment for fraud against a defendant is on par with other unsecured creditors and does not have any spe - cial priority over the defendant’s assets. In addi - tion, a plaintiff in a civil action normally cannot recover proceeds of fraud beyond the damages it suffered. Where the government has instituted a civil or criminal action for fraud, a defendant may be required to disgorge the proceeds of the alleged fraud. Those funds may be used as res - titution to compensate victims. Where the entity or individual alleged to have engaged in fraud is insolvent, different rules gov - ern. For example, dozens of states have enacted the Uniform Fraudulent Transfer Act (UFTA), now known as the Uniform Voidable Transactions Act (UVTA), which permits creditors to void a debt - or’s transaction when the debtor engaged in a transaction with the intent to defraud a credi - tor, or when the debtor made a transfer without receiving “reasonably equivalent value” in certain circumstances. The US Bankruptcy Code also provides recourse to creditors seeking to avoid fraudulent transfers. Under those laws, a victim of fraud may, in some instances, take priority over other credi -
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