U.S. court reverses US$564-million verdict against BMO in Ponzi scheme lawsuit
Win for Canadian bank will boost earnings in fourth quarter, says analyst
A U.S. court has reversed a previous verdict that ordered a subsidiary of the Bank of Montreal to pay US$564 million in relation to a Ponzi scheme.
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As a result, BMO said it expects to reverse its current provision of about $1.1 billion — including accrued interest — for the case and recover $875 million after tax. The recovery is expected to be recorded in its fourth-quarter results due in early 2025.
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Darko Mihelic, an analyst at RBC Capital Markets, said the outcome would help boost BMO’s earnings in the fourth quarter.
“We have not seen a reversal of a prior verdict before, but we view this as a clear positive,” he said in a note to clients on Friday. “We believe there is a small chance that this verdict gets appealed, but we believe that BMO reversing its provision shows confidence that this will likely not be the case.”
The lawsuit is related to a Ponzi scheme carried out by an individual named Thomas Petters, who is currently serving a 50-year prison term after being convicted in 2009. He operated a deposit account at M&I Marshall and Ilsley Bank (M&I), which BMO bought in 2011.
The case against BMO was filed by Douglas Kelley, who was a court-appointed trustee looking to recover the money lost as a result of the scheme. He claimed that M&I was aware of the Ponzi scheme and ignored the red flags.
A jury ruled in favour of the trustee in 2022, but the decision was reversed on Thursday. BMO had said on Nov. 8, 2022, that it would pursue all available legal options after the initial verdict.
“We are very pleased with the decision of the United States Court of Appeals for the Eighth Circuit,” a BMO spokesperson said in a statement on Thursday.
Mihelic expects the outcome to boost BMO’s reported earnings per share in the fourth quarter by $1.20. He also expects the bank’s common equity tier one (CET1) ratio, which compares a bank’s liquid holdings, such as cash and stock, against its assets and is an indicator of how well a bank is performing, to improve by 38 basis points.
“The impacts of this reversal increases the ranking of BMO’s CET 1 ratio among the large Canadian banks that we cover to second lowest in Q4/24, up from the lowest ranking our current model suggests,” he said.
BMO fell short of analysts’ expectations in its third-quarter results reported in August, as it was forced to set aside significantly more money to cover potential losses on impaired loans. It reported net income for the quarter of $1.8 billion, compared to $1.5 billion in the same period a year ago.
• Email: nkarim@postmedia.com
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