Recent Uptick in Financial Fraud Claims Can Be Contended Through Classic Defense

The COVID-19 outbreak brought much uncertainty and vulnerability, due in no small part to the uptick in financial fraud. Since May of 2020, it has been reported that the Department of Justice has charged over 600 defendants for fraudulent activity related to COVID-19, including selling financial products and investment scams, submitting fake loan applications, attempting to seize personal data through fake texts/emails/phishing and opening bank accounts with another person’s identity. To help combat this problem, in May of 2021, the Office of the Attorney General announced that it established a COVID-19 Fraud Enforcement Task Force to “deter, detect, and disrupt future fraud wherever it occurs.”

Bank account and investment fund holders feel that vulnerability, too, and seem to be looking to financial institutions to rectify their broken relationships and loss of trust. It is not uncommon for individuals who have been trusted with powers of attorney (POA) to attempt and/or consummate unauthorized withdrawals or other transactions from financial products like annuities, investment retirement accounts or bank accounts. Account holders or beneficiaries who have a stake in the funds want to be righted but instead of looking to the wrongdoer, it is often the financial institution that takes the brunt of the claims. Indeed, account holders and/or beneficiaries may feel compelled to bring a claim against financial institutions for authorizing these transactions when, in reality, it was their trusted confidants that wronged them. In the face of these claims, however, financial institutions have a strong grounds to defend against these claims: first, financial institutions do not owe a purported fiduciary duty to account holders or beneficiaries to investigate suspicious transactions, and second, financial institutions can rely on valid POAs presented to them. In fact, with regard to the second point, most statutes speaking to the validity of powers of attorneys often contain provisions regarding the lack of liability for those that are presented with and rely upon seemingly valid POAs. Two federal courts have recently addressed this issue and, consistent with the rule, found in favor of the financial institution.

In Alabama federal court, the account holder of a mutual fund designated a family member as the POA of the account. The POA subsequently made withdrawals from the account and distributed the monies to the fund’s beneficiaries. A claim was asserted against the financial institution for breach of fiduciary duty by allowing the POA to make “suspicious” withdrawals due to the dollar amount withdrawn shortly after the account holder’s death and failing to investigate the transactions. The court, finding for the financial institution, found that the financial institution did not owe, and thus did not breach, any purported fiduciary duty to investigate suspicious or predatory behavior associated with an account. Further, because the alleged fraudster presented a valid POA to make the withdrawals, the financial institution relied in good faith on the POA.

In a separate case in the Sixth Circuit, the financial institution relied on a valid, notarized POA to authorize various withdrawals and deposits from an investment account. The account holder, however, alleged that he did not name the family member as POA and, thus, the financial institution breached its fiduciary duty to him. Again, the court found for the institution on the basis that third parties, such as financial institutions, can authorize a transaction on the basis of a facially valid POA. In fact, the court noted, requiring institutions to investigate every POA transaction would effectively remove the power of a POA. So long as the POA is signed, witnessed and notarized, then a financial institution can rely on it. In so relying, a financial institution does not breach any alleged duty of care to account holders or beneficiaries, even when the transaction is allegedly suspicious.

While this is not a new defense to such claims, the financial institution’s actions in relying upon a POA lends to typically positive outcomes for the financial institutions. Looking ahead, when financial institutions continue to be faced with claims for breach of fiduciary duty in connection with unauthorized transactions, remembering this simple defense, if applicable, will provide the financial institution with solid footing to defend against the claims.

* Louise Chakejian, a law clerk in the insurance services group, assisted in the preparation of this article.