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Norton v. U.S. Bank National Association

Court of Appeals of Washington, Division 1

February 18, 2014

JOHN NORTON and KRISTINE NORTON, individually, and derivatively on behalf of LARCO-BOLIVAR INVESTMENTS, LLC, and SHELL LA PAZ, LLC; NORTHLAND CAPITAL LLC, individually, and derivatively on behalf of NDG-BRYCON, LLC; and P.R.E. ACQUISITIONS, LLC, Respondents,

Becker, J.

Before us on discretionary review is an order requiring a bank to produce documents containing information about how the bank conducts internal monitoring and investigations to detect fraud and money laundering. Because such information is privileged from discovery under federal law, we conclude the trial court abused its discretion by ordering discovery and we remand for entry of a protective order.

Jose Nino de Guzman is a former U.S. Bank employee. In 2006, he left the bank to engage in real estate development in Peru through his investment company, NDG Investment Group LLC. Plaintiffs John and Kristine Norton invested $11 million. Some of the money they invested was deposited in accounts held by Nino de Guzman and his company at U.S. Bank.

In 2009, the Nortons discovered that Nino de Guzman had been running a Ponzi scheme and their money was gone. The Nortons brought suit against Nino de Guzman and NDG Investment to recover their losses. Neither Nino de Guzman nor NDG Investment is defending the action.

The Nortons added U.S. Bank as a defendant. Against the bank, the Nortons alleged that when Nino de Guzman left the Bank's employ, he enlisted other employees and paid them bonuses and commissions to help him solicit investors; that the bank did not properly investigate or supervise its employees who were simultaneously working both for the bank and for Nino de Guzman; that money held by the bank in trust or fiduciary accounts was diverted into personal accounts of Nino de Guzman; and that in the summer of 2008, the bank initiated a money laundering investigation concerning Nino de Guzman and became aware of the possibility that he was engaging in criminal activity but took no action and continued to profit from his accounts. The Nortons' complaint charged the bank with breach of fiduciary duty, securities violations, aiding and abetting fraud, conversion, unjust enrichment, consumer protection violations, and negligent hiring, retention, and supervision.

In response to discovery requests by the Nortons, U.S. Bank produced account statements and account opening documents for accounts belonging to Nino de Guzman and his company, copies of the checks, and documentation of international wire transfers. According to the Nortons, these documents showed that Nino de Guzman opened over 30 accounts at U.S. Bank, through which he circulated investor money to Peru and then back to his accounts. Some of his checks were written to U.S. Bank employees. His accounts showed repeated overdrafts.

The Nortons believed that Nino de Guzman's transactions aroused suspicion and caused the bank to monitor his accounts and the accounts of the employees. They made discovery requests for, generally, all documents generated by the bank in internal investigations relating to Nino de Guzman's accounts. For example, an interrogatory asked the Bank to describe "any due diligence, investigation and/or inquiry conducted by or on behalf of U.S. Bank regarding the background and/or conduct of Nino de Guzman and/or his Affiliated Entities." Another interrogatory asked for the reason any such investigation was initiated and asked the Bank to describe any action taken in response to such investigation. As well, the Nortons asked for disclosure of the bank's methods and policies for monitoring suspicious activity and detecting money laundering.

The bank moved for a protective order on the ground that disclosure of material responsive to these requests was prohibited by the Bank Secrecy Act, 31 U.S.C. § 5318(g). The bank asked the trial court to:

enter an order barring discovery of documents and information concerning (a) any alleged suspicious activity monitoring, investigation, or reporting conducted by U.S. Bank related to accounts held by Nino de Guzman or NDG at U.S. Bank, including but not limited to any documents or information that would reveal the existence or non-existence of any such investigation; and (b) the methods, policies and procedures U.S. Bank employs generally to monitor and detect for suspicious activity ....

The trial court denied the bank's motion for a protective order and ordered the bank to respond fully.[1] This order is before us on the bank's motion for discretionary review.

The issue involves interpretation of a statutory privilege. Our review is de novo. Jane Doe v. Corp. of President of Church of Jesus Christ of Latter-Day Saints. 122 Wn.App. 556, 563, 90 P.3d 1147 (2004), review denied. 153 Wn.2d 1025(2005).

Congress enacted the Bank Secrecy Act in 1970 to require national banks to assist the government in monitoring for financial crimes. In 1992, Congress gave the Comptroller of the Currency the power to require financial institutions to report suspicious transactions to the federal government. 31 U.S.C. § 5318(g)(1); Union Bank of Calif, v. Superior Court. 130 Cal.App.4th 378, 389, 29 Cal.Rptr.3d 894 (2005). The statute also provides that banks may not notify persons involved in the suspicious transaction that it has been reported. 31 U.S.C. § 5318(g)(2)(A).

Under the comptroller's regulations, each bank is required to "develop and provide for the continued administration of a program reasonably designed to assure monitoring compliance with the record keeping and reporting requirements" of the act. 12 C.F.R. § 21.21(b). When a bank detects a known or suspected violation of federal law or a suspicious transaction related to money laundering, the bank must file a "Suspicious Activity Report" (also known as SAR) to an officer or agency designated by the Secretary of the Treasury, using a form prescribed by the comptroller. 31 U.S.C. § 5318(g)(1), (4); 12 C.F.R. § 21.11(a), (b), (c). Specifically, banks must file a report when they suspect: (1) a bank insider is involved, (2) violations aggregating $5, 000 or more where a suspect can be identified, (3) violations aggregating $25, 000 or more regardless of potential suspect, or (4) violations aggregating $5, 000 or more involving potential money laundering or violations of the Banking Secrecy Act. 12 C.F.R. §§ 21.11(c)(1)-(4).

As provided by regulation, Suspicious Activity Reports are confidential. Banks are prohibited from responding to a discovery request for a Suspicious Activity Report or any information that would ...

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