American Savings Bank in Honolulu is facing two lawsuits that say it failed to protect an elderly customer from financial abuse by a branch employee.
The $6.9 billion-asset thrift said it expects to be cleared of any wrongdoing.
Attorneys specializing in elder finance abuse said the suits serve as a reminder that banks must alert law enforcement officials directly — as well as file suspicious-activity reports — if there is any hint such abuse could have occurred. Indeed, it is now mandatory in states including California and Florida that banks report suspicion of this abuse directly to authorities, or face civil penalties.
American Savings is being sued by the customer, Ada Lim, and its former security chief, who investigated her case.
Ms. Lim’s suit, filed Aug. 2 in Hawaii’s First Circuit Court, claims that American Savings concealed or suppressed evidence of wrongful conduct by Marilyn Demotta, a branch operations supervisor who started managing Ms. Lim’s finances in February 2004.
The former security director, Bert Corniel, made a similar claim in his suit, also filed Aug. 2.
In a statement e-mailed to American Banker last week, American Savings’ chief executive, Constance Lau, called the allegations in the two suits “outrageous.”
“I have directed our attorneys to take every appropriate legal step to respond to these unfounded allegations despite the apparent orchestrated and unfair attempts by the plaintiffs to sow fear and uncertainty among our customers and stakeholders,” the statement said. “At the end of the day, I expect the bank to be fully exonerated.”
Paul Greenwood, a deputy district attorney for San Diego County and the head of its elder-abuse unit, would not comment directly on this case but said that no bank should conclude on its own whether financial abuse of an elderly customer has occurred. Instead, banks should seriously consider contacting law enforcement authorities directly, in addition to filing suspicious-activity reports, if there is unusual activity involving an elderly customer and an employee or anyone else, such as an estranged relative.
“An internal investigation by a bank itself is not enough,” Mr. Greenwood said. “The best judges of elder finance abuse are law enforcement and not a bank.”
He said that cases like this demonstrate the importance of state laws requiring that banks report suspected elder financial abuse. A law passed this year in California and now in effect requires bank employees to phone someone in law enforcement immediately if they have reasonable suspicion of such abuse.
Banks can be fined $1,000 if their employees with direct contact or knowledge of an elderly customer’s transactions fail to report suspected abuse, or $5,000 if the failure to report was willful. Other states mandating that banks report suspicion of this abuse include Florida, Georgia, and Mississippi.
To be sure, banks also have to weigh other issues in cases that are not clear-cut, for fear of being sued by wrongly accused people or elderly customers charging wrongful exposure of confidential financial information, said John M. Gross, a partner at Powell Goldstein LLP in Atlanta.
“But you don’t have to be 100% sure that a crime has been committed to contact law enforcement,” Mr. Gross said. “It’s also for the bank’s own protection — nothing’s worse than waiting until everything has been lost, before a bank starts working with law enforcement.”
The Federal Bureau of Investigation is investigating both lawsuits’ allegations.
Ms. Lim’s suit says that Ms. Demotta falsely told Ms. Lim, now 91, that she was also a financial planner and an accountant. As a result, it says, Ms. Demotta was able to obtain a number of pre-signed checks from Ms. Lim, of which she then diverted at least $900,000 to either herself; her father, Bernardino A. Pidong; and to Ms. Lim’s estranged daughter, Phyllis Huppert.
(Ms. Demotta said in local news reports that she was “pulled into” a family dispute; she did not elaborate. American Banker’s repeated attempts to reach Ms. Demotta were unsuccessful.)
Mr. Lim’s lawyer, Lyle S. Hosoda, said in an interview last week that American Savings failed in its fiduciary responsibility to protect his client. “Ms. Lim was not placing her trust in Ms. Demotta as an individual, but as an employee of American Savings — she thought American Savings was taking care of her.”
The suit claims that Ms. Demotta filed Ms. Lim’s 2003 state and federal tax returns incorrectly, which resulted in about $300,000 to $400,000 of unpaid taxes, interest, and penalties.
Ms. Lim’s former accountant grew suspicious, the suit says, when he saw the incorrect tax returns, and he alerted American Savings’ branch manager in Liliha, Hawaii, in July 2004. When Ms. Demotta continued to write checks on Ms. Lim’s account, the former accountant again told the branch manager about it, in September, the suit says.
The complaint says the thrift then attempted to cover up Ms. Demotta’s actions by getting Ms. Lim to re-sign documents in February 2005 in the presence of a notary stating that said Ms. Lim had made a $304,000 loan to Ms. Demotta at 2% interest.
The suit says Ms. Demotta had got Ms. Lim to sign the loan documents in October, but they were not notarized. It says that Ms. Lim signed the loan documents under false pretenses, and that the loan was a cover-up for a series of unauthorized withdrawals Ms. Demotta had earlier made on Ms. Lim’s account using the pre-signed checks. Instead of looking into what actually happened, American Savings covered its tracks by notarizing the loan documents, the suit says.
American Savings, a unit of Hawaiian Electric Industries Inc., fired Ms. Demotta in April 2005, but the lawsuit says Ms. Lim was not made whole by the bank for Ms. Demotta’s alleged theft. Ms. Lim, whose complaint names Ms. Demotta and Ms. Huppert, is demanding full repayment, punitive damages, and attorney fees.
American Savings spokesman A.J. Oxley told American Banker on Thursday that the thrift had informed law enforcement that there were “activities not of the norm” regarding Ms. Lim’s account.
Ms. Demotta was fired “for violation of bank policy” and “any suggestion of elder abuse is unfounded,” Mr. Oxley said.
Mr. Corniel’s suit says that on Jan. 26, 2005, he obtained a written confession from Ms. Demotta that she took Ms. Lim’s money. But in February 2005, it says, employees of American Savings encouraged Ms. Lim to sign notarized loan documents to cover up the alleged theft.
Mr. Corniel’s suit says that he filed a suspicious-activity report with law enforcement officials and regulators, but was told by his supervisor to file an amended report that did not characterize Ms. Demotta’s actions as fraudulent. He refused and was demoted, he claims.
Mr. Corniel continued to be stripped of duties and ultimately was forced to quit this June after suffering undue physical and mental stress, his complaint says. He is asking for damages under the Whistleblower Protection Act.
In her statement, Ms. Lau said that American Savings did not “cover up anything... We have also never stopped anyone from filing a required report to a government agency.”
In a separate statement e-mailed Thursday to American Banker, American Savings marketing and communications director, Craig Togami, said, “Although we cannot comment on the investigation, we can say that we have and will continue to cooperate and provide investigators with all the relevant information as it is requested.”
Mr. Gross said American Savings’ board audit committee should oversee an independent, external investigation of the allegations. Mr. Oxley would not say whether the board was conducting its own investigation, but he said the thrift was conducting an internal review.
