Several banks in Texas have forfeited nearly $7 million to compensate dozens of senior citizens allegedly fleeced by a San Antonio man in a Ponzi scheme.

The incident has provoked the Texas banking commissioner to advocate a change in the state law that makes banks liable in such scams.

The Bexar County district attorney plans to distribute the money to about 90 investors, who, the district attorney alleges, unwittingly gave financial planner Bradley Farley the authority to use their certificates of deposit as collateral for $9.1 million in personal loans he took out at six banks in the San Antonio area.

Mr. Farley later defaulted on the loans.

The banks have argued that they have the right to keep the CDs, since Mr. Farley had permission to borrow against them. But the district attorney seized the money for the investors by using a state law governing the forfeiture of ill-gotten gains.

Bankers say the law was never intended for situations like this - and Randall S. James, the state's banking commissioner, agrees. He is urging several state lawmakers to amend the Texas forfeiture law to limit the liability for banks.

Mr. James said he is "concerned" about a provision in the law "that states a lender's lien is invalid if it is taken after commission of a crime."

"That poses a horrendous risk," Mr. James said, "because since there is such a turmoil over privacy in this country, banks don't ask you where the money comes from. It has become quite clear that something needs to be changed in the law."

In the San Antonio case, the six banks contend that there was no indication that Mr. Farley was acting inappropriately when he used the investors' CDs.

Two years ago Mr. Farley allegedly started persuading dozens of investors, most in their 70s and 80s, to let him invest in insured certificates of deposit on their behalf. The district attorney claims that the investors then unwittingly gave Mr. Farley control of the CDs by signing a document labeled "application for insured deposit" that actually gave him permission to use those CDs as collateral for personal loans.

When Mr. Farley defaulted on his loans, and the banks took possession of the CDs. The district attorney stepped in when investors complained to state authorities that Mr. Farley had also stopped paying them interest on their CDs.

Mr. Farley was arrested in February, and his properties were seized, as was about $9.1 million in cash and CDs from the banks. His case is scheduled to go to trial next February.

While the banks claim the CDs are rightfully theirs, four of the six banks - Wells Fargo Bank, Bank of America, $13 billion-asset Guaranty Federal Bank in Dallas, and $331 million-asset American Bank of Commerce in Wolfforth - gave up their fight after the district attorney threatened them with forfeiture hearings.

The two remaining banks, $44.5 million-asset Clear Lake National Bank in San Antonio and $70 million-asset Northwest Bank in Roanoke, will follow suit within the month, according to attorneys for the banks.

Cliff Herberg, chief of the district attorney's white-collar crime division, said in a June interview that the banks should have known that Mr. Farley was running a Ponzi scheme. However, Mike Broome, an attorney for Northwest, said that his client did nothing wrong.

"My bank made a very routine, run-of-the mill CD-secured loan," Mr. Broome said. "We had a letter from Bank of America stating that Mr. Farley was a good, valued customer, and that they had had no problems with him. The bank did what they should have done to make their CD-secured loan. But it turns out that under this forfeiture statute," the certificate of deposit "is considered contraband, and we'll most likely lose it."

Mr. Broome contends that the problem rests not with the banks, but with the state law. "The forfeiture statute is pretty broad and pretty poorly drawn, so even though there's been no criminal wrongdoing on the part of my bank, the bank could still lose under the statute."

Mr. James said that he is confident that lawmakers will be able to work out a compromise in next year's session that will protect crime victims as well as financial institutions.

"I don't think that law enforcement," in these cases, "should have the ability to go after the bankers just because they have deep pockets," he said. The banks involved in this case "are owned by shareholders who are probably just like the individuals who were allegedly taken in by the con artist."

Mr. Broome warned that if the Texas statute is not changed, smaller banks will suffer.

"Now a bank can never make another CD-secured loan, because there's always a chance that the funds had been derived from a criminal activity that happened 15 years ago," he said.

The current forfeiture statute allows law enforcement agencies to seize assets gained from crimes years ago, no matter how many times the funds have changed hands since the crimes occurred, Mr. Broome said. "Time does not heal all wounds here."

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