Commercial Litigation and Arbitration

Standards for Proving “Deliberate Ignorance” to Establish Knowledge — Collective Knowledge Not Appropriate to Establish Subjective Intent

From Chaney v. Dreyfus Service Corp., 2010 U.S. App. LEXIS 1572 (5th Cir. Jan. 25, 2010):

Plaintiffs, receivers of seven insurance companies (the "Receivers"), appeal the grant of summary judgment in favor of Dreyfus Service Corporation ("DSC"). Throughout the 1990s the insurance companies' assets were looted through a complex fraud scheme perpetrated by the now infamous felon, Martin Frankel. In the underlying suit, the Receivers sought to impose tort and civil RICO liability on DSC, the investment company through which Frankel funneled the insurance companies' funds before moving them to his Swiss bank account. Had DSC properly discharged its duties, the plaintiffs argued, it would have uncovered Frankel's scheme and their losses would have been averted. They also alleged that by deliberately turning a blind eye to Frankel's obviously suspicious activities DSC effectively joined Frankel's conspiracy, thus becoming liable for treble damages under the civil recovery provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). ***

The Receivers seem to grant that no one at DSC actually knew that money laundering was ongoing, arguing instead that the requisite knowledge can be established through the doctrine of deliberate ignorance. Deliberate ignorance exists where there is "a conscious effort to avoid positive knowledge of a fact which is an element of an offense charged . . . so [the defendant] can plead lack of positive knowledge in the event he should be caught." United States v. Restrepo-Granda, 575 F.2d 524, 528 (5th Cir.1978). It exists if (1) "the defendant was subjectively aware of a high probability of the existence of the illegal conduct" but (2) "purposely contrived to avoid learning of the illegal conduct." United States v. Faulkner, 17 F.3d 745, 766 (5th Cir. 1994). Neither awareness of some probability of illegal conduct nor a showing the defendant should have known is enough, and so "[t]he circumstances which will support [a] deliberate indifference instruction are rare." United States v. Lara-Velasquez, 919 F.2d 946, 951 (5th Cir. 1990). It requires conscious action in light of known facts amounting to a "charade of ignorance." ... In short, "deliberate ignorance is reflected in a . . . defendant's actions which suggest, in effect, 'Don't tell me, I don't want to know.'" ... Deliberate ignorance is the legal equivalent of knowledge.

The record does not establish that any individual at DSC was subjectively aware of a high probability that Frankel was engaged in money laundering. Both parties agree that while Frankel's activity would have been suspicious to someone trained to recognize the "red flags" associated with money laundering, DSC's client specialists were not so trained. Beyond the transactions themselves there was precious little information provided from Frankel to the client specialists. The few odd statements made by Frankel to client specialists — for example, that he had to engage in complex multi-bank transactions in order to "show" money for a real estate deal — were certainly not enough to make anyone aware of a high probability that he was engaged in money laundering. Moreover, there is no evidence that Frankel had repeated dealings with the same specialist.

The Receivers seek to avoid this conclusion by aggregating DSC's client specialists' experience with that of DSC's compliance officers through a "collective knowledge" theory. This argument was never raised to the district court and we need not consider it now. ***

Even if we were to consider it, we note that, as a general rule, where "an essentially subjective state of mind is an element of a cause of action" we have declined to allow this element to be met by a corporation's collective knowledge, instead requiring that the state of mind "actually exist" in at least one individual and not be imputed on the basis of general principles of agency. Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004); see also United States v. Philip Morris USA Inc., 566 F.3d 1095, 1122 (D.C. Cir. 2009) (distinguishing "collective knowledge" from "collective intent" and questioning the latter's "legal soundness"); Restatement (2nd) Agency § 275, comment b. The first prong of our deliberate ignorance doctrine clearly falls within this category. See Lara-Velasquez, 919 F.2d at 951-52 ("The term deliberate ignorance denotes a conscious effort to avoid positive knowledge. . . . [It thus] protects a defendant from being [held liable] for what he should have known.") (first emphasis added). Of course, even if the first prong of our test could be met by corporate knowledge, we would still have to find that someone at DSC purposely contrived to avoid confirming information that was suspected exclusively on a corporate level. See id. at 952 ("[A] defendant could not purposely avoid learning of illegal conduct unless he were subjectively aware that a high probability of illegal conduct exists.") (emphasis added).

[Footnote] 21 The Receivers argue that such a rule, i.e., that knowledge will not be aggregated across individuals in a corporation to meet the subjective awareness prong of our deliberate ignorance test, would allow corporations to avoid liability by compartmentalizing information. To the extent that this is purposeful, we consider it in the next section; to the extent that it is an incidental effect of the corporate structure, we are not concerned, as the basis for RICO conspiracy liability is the intentional facilitation of a RICO enterprise, not the incidental facilitation thereof.

The Receivers' more supportable argument is that DSC's management knew that structuring DSC's policies in the way they did — requiring minimal information for account openings; taking no steps to verify this information; segregating transactional and compliance personnel; randomly assigning client specialists; systematically refusing to train client specialists to identify suspicious account behavior; all as part of a larger effort to compete on the basis of liquidity — created a high probability that its funds would be used for money laundering. Refusing to implement policies capable of identifying money laundering under these circumstances constituted "purposeful contrivance" — in other words, DSC's management knew its customers would take advantage of its structure to engage in money laundering, knew what steps would likely detect it, but declined to take these steps.

Though not directly on point, cases cited by the Receivers seem to provide some support for such a theory. See Ga. Elec. Co. v. Marshall, 595 F.2d 309, 319 (5th Cir. 1979) (finding that violation of an OSHA regulation is "willful" when a corporation acts with complete indifference to its occurrence by failing to educate its employees). Certainly, failing to ask questions in the face of highly suspicious activity may be enough, in some situations, to satisfy the purposeful contrivance prong of the test. United States v. Nguyen, 493 F.3d 613, 622 (5th Cir. 2007) ("Not asking questions can be considered a purposeful contrivance to avoid guilty knowledge."). Nevertheless, in this case, the record indicates that DSC's actions at worst rose to the level of recklessness. DSC's policies do not amount to a special invitation targeting people like Frankel, such that would support a jury finding that DSC's managers were subjectively aware of a high probability that its funds would be used for illegal purposes.

Because the Receivers have presented no theory by which DSC could be properly charged with knowledge of Frankel's money laundering, summary judgment was appropriate on the Receivers' RICO conspiracy claim.

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