September 18, 2014 / 11:02 PM / 3 years ago

Bank of Montreal is sued over Tom Petters' Ponzi scheme

* Lawsuit by bankruptcy trustee for Petters creditors

* BMO unit said to know of Petters' fraud, do nothing

* Lawsuit seeks $23.6 billion based on account transfers

By Jonathan Stempel

Sept 18 (Reuters) - Bank of Montreal was sued on Thursday by a trustee liquidating two Florida funds that claimed to have lost money in a Ponzi scheme operated by Minnesota businessman Thomas Petters.

The lawsuit seeks to recoup $23.6 billion, more than six times the estimated $3.65 billion size of Petters' fraud, based on sums transferred by Petters over five years to an account at Marshall & Ilsley Bank, which Bank of Montreal now owns.

"There is no merit to these claims and we will defend ourselves vigorously," Carey Allen, a spokeswoman for Bank of Montreal's BMO Harris Bank unit, said in an emailed statement.

The case was brought by Barry Mukamal, a trustee liquidating two funds known as Palm Beach Finance.

These funds filed for bankruptcy protection in November 2009, just over a year after Petters' fraud was uncovered and his businesses were put into receivership.

Thursday's lawsuit was filed with the U.S. district court in West Palm Beach, Florida, nearly six years after Petters' offices were raided by the FBI in September 2008.

Petters, now 57, was convicted in December 2009 on all 20 criminal counts he faced, including fraud and money laundering, and is serving a 50-year prison term.

Prosecutors accused him of using one of his companies to bilk investors who thought he was using their money to buy consumer electronics for resale to retailers such as Costco Wholesale Corp and BJ's Wholesale Club Inc.

In his lawsuit, Mukamal said Marshall & Ilsley knew the "astronomical" activity in Petters' account bore no relationship to Petters' alleged business and that Petters was involved in money laundering on an "unprecedented scale."

But he said the Milwaukee-based bank did nothing, hoping instead to expand its "important" and "substantial" relationship with Petters. The trustee also said Marshall & Ilsley did not use good faith in handling money flows.

Bank of Montreal bought Marshall & Ilsley in 2011.

Florida lies within the 11th federal judicial circuit, which also includes Alabama and Georgia.

In 2010, the federal appeals court in that circuit said an initial recipient of a debtor's fraudulently transferred funds can avoid liability for the transfer if it served merely as a "conduit" for the debtor, was an "innocent participant" in the transfer, and acted in good faith.

"Tom Petters ran the third-largest financial fraud in United States history through a single bank account at M&I Bank," the trustee's lawyer Solomon Genet said. "We look forward to proceeding before a Florida jury."

The case is Mukamal v. BMO Harris Bank NA, U.S. District Court, Southern District of Florida, No. 14-01660. (Reporting by Jonathan Stempel in New York; Additional reporting by David Adams in Miami; Editing by Steve Orlofsky)

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