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A U.S. appeal court reversed a US$500-million judgment against Bank of Montreal’s U.S. subsidiary, ruling that it wasn’t responsible for losses connected with a multi-billion dollar Ponzi scheme.

Following a decision by the U.S. Court of Appeals for the Eighth Circuit, which overturned a jury’s verdict against BMO Bank National Association, the bank said it would reverse the $1.2-billion provision it had taken for this case. Doing so will result in a $875 million after-tax recovery that will show up in its fourth-quarter results.

BMO appealed a verdict against a bank it acquired in 2010, Marshall and Ilsley Bank (M&I), which found that M&I aided a Ponzi scheme carried out by a Minnesota man, Thomas Petters, and a company he founded to facilitate that scheme, Petters Company Inc. (PCI).

According to the court’s decision, Petters told investors PCI purchased consumer electronics from wholesalers and resold the products to retailers.

“In reality, Petters rerouted much of the money to himself and his fellow fraudsters using PCI’s accounts at M&I Bank,” the decision said.

The scheme collapsed in 2008, Petters was convicted of fraud and sentenced to 50 years in prison, and PCI was later placed into bankruptcy after pleading guilty to a series of offences.

The receiver for PCI, Douglas Kelley, then sued the bank, alleging it facilitated the scheme.

“Kelley alleged that bank employees ignored money-laundering alerts from the bank’s account-monitoring software and allowed PCI to overdraft millions of dollars, contrary to the bank’s policies,” the court noted.

According to the court, the bank argued that “PCI could not recover based on M&I’s alleged wrongdoing because PCI was itself a wrongdoer of equal or greater fault.”

However, that defence was rejected by the U.S. bankruptcy court, and the receiver was awarded more than US$500 million — including US$484 million in compensation and US$79.5 million in punitive damages — after the lower court’s found the bank aided and abetted a breach of fiduciary duty by PCI’s officers.

The bank sought a review of that decision to a U.S. district court, which denied its appeal.

BMO then appealed the verdict to the Eighth Circuit, arguing that “PCI orchestrated the scheme and is necessarily more culpable — or at least, no less culpable — than the bank.”

The key issue in the appeal was whether the bank could raise that defence in an action brought by the receiver for the company involved in the wrongdoing, rather than the company itself.

The appeal court ruled the defence was available to the bank, and that — rather than sending the case back to the lower court in light of that finding — the lower court’s verdict against the bank must be thrown out.

“PCI was created solely to operate the Ponzi scheme. Even assuming that the bank aided the scheme to the degree that Kelley alleges, BMO cannot be more culpable than the entity that orchestrated the scheme,” the appeal court said in its decision.

The court’s conclusion is consistent with a previous decision related to the Bernie Madoff case, which prevented the trustee in that case from suing JPMorgan Chase on behalf of Madoff’s failed brokerage firm for wrongdoing that Madoff carried out.