How Quickly Can You Spend $108 million?

New York financier Andrew Caspersen recently pled guilty to a scheme in which he defrauded investors – including close friends and family members – out of tens of millions of dollars.  Caspersen’s pitch was that he had access to a “practically risk-free” investment in which loaned money would sit in a bank account as collateral for a credit facility.  The investors would then receive quarterly interest payments of 15 to 20 percent in return.  The supposed fund and investment were fake.  Caspersen instead used “new” money to pay “old” investors, spent some of the money himself, and gambled away the rest of it.  In its charging document the government alleged that Caspersen lost a staggering $108 million in stock option trading between February and March 2016.

One intriguing question remains unanswered: how did brokerage firms permit Mr. Caspersen to gamble away $108 million dollars in risky stock option trades over a four-week period?  Brokerages have an obligation to “know their customer” including their business, their investment objectives, and the source of their funds.  If, for example, the brokerage firm knew that Mr. Caspersen was trading other people’s money, it is curious (to say the least) that the brokers didn’t immediately suspend trading in the accounts.  And even if the brokers somehow believed Mr. Caspersen was trading his own funds, how was he permitted to literally trade until the accounts hit zero?  In today’s regulatory environment, firms have detailed anti-money laundering departments and computer programs committed to monitoring trades, and triggering internal alerts when there is a large velocity of trading (and losses).  It will be interesting to see how closely the brokerage firms were tracking Mr. Caspersen’s frenetic trading, and how and why Mr. Caspersen was permitted to continue trading as his massive losses mounted.

One intriguing question remains unanswered: how did brokerage firms permit Mr. Caspersen to gamble away $108 million dollars?

One possible explanation is that the brokers involved knew Mr. Caspersen was trading other people’s money but turned a blind eye because of the huge commissions being earned for the massive trading activity in the accounts.  If that were the case, the brokerage firms themselves may be liable for the theft under an aiding and abetting theory.  Simply put, the law recognizes that anyone who has knowledge of, and actively assists another in a fraud are themselves liable for the loss incurred.  This was precisely the scenario in the 2009 Massachusetts case of Cahaly, et al. v. Merrill Lynch, et al., where the plaintiffs alleged that the brokerage firm knew and helped an escrow agent gamble away $9 million of client funds in naked stock options.  After a four week trial, in which NBP was plaintiff’s co-counsel, the jury answered this question affirmatively, and found Merrill Lynch liable for the losses.  In a subsequent 2010 bench trial, the Court found Merrill Lynch liable for further damages and awarded attorneys’ fees.  You can read the decision here.

For more information, contact Will Nystrom.