New York Times - Business Section February 6, 2008 Papers Show Wachovia Knew of Thefts By CHARLES DUHIGG Last spring, Wachovia bank was accused in a lawsuit of allowing fraudulent telemarketers to use the bankâs accounts to steal millions of dollars from unsuspecting victims. When asked about the suit, bank executives said they had been unaware of the thefts. But newly released documents from that lawsuit now show that Wachovia had long known about allegations of fraud and that the bank, in fact, solicited business from companies it knew had been accused of telemarketing crimes. Internal Wachovia e-mail, for example, show that high-ranking employees at the nationâs fourth-largest bank frequently warned colleagues about telemarketing frauds routed through its accounts. Documents also show that Wachovia was alerted by other banks and federal agencies about ongoing deceptions, but that it continued to provide banking services to multiple companies that helped steal as much as $400 million from unsuspecting victims. âYIKES!!!!â wrote one Wachovia executive in 2005, warning colleagues that an account used by telemarketers had drawn 4,500 complaints in just two months. âDOUBLE YIKES!!!!â she added. âThere is more, but nothing more that I want to put into a note.â However, Wachovia continued processing fraudulent transactions for that account and others, partly because the bank charged fraud artists a large fee every time a victim spotted a bogus transaction and demanded their money back. One company alone paid Wachovia about $1.5 million over 11 months, according to investigators. âWe are making a ton of money from them,â wrote Linda Pera, a Wachovia executive, in 2005 about a company that was later accused by federal prosecutors of helping steal up to $142 million. Ms. Pera left Wachovia in 2006, and could not be located. Lawyers pursuing the lawsuit against Wachovia, which was filed in a Pennsylvania federal court on behalf of a woman named Mary Faloney and other apparent victims, have asked a judge to declare the case a class action, which could expand it to as many as 500,000 plaintiffs. The lawsuit alleges that Wachovia accepted fraudulent, unsigned checks that withdrew funds from the accounts of victims, often elderly. Wachovia forwarded those checks to other banks that were unaware of the frauds, which in turn sent money to the swindlers. A judge is expected to rule on the class action request by this summer. Wachovia, in court filings, has denied the suitâs allegations. The company declined to comment on the pending litigation. However, Wachoviaâs senior vice president for risk management, Alan Chudoba, said that the bank introduced reforms aimed at telemarketing frauds last summer. Those changes, which came about after an article in The New York Times last May reported that thieves had used Wachovia accounts, include greater scrutiny of accounts used by telemarketers and stronger fraud protections. In a statement, Wachovia said: âEarning the trust of our customers is at the heart of what we do every day and we regret this situation occurred. We took this issue very seriously, and senior management, led by C.E.O. Ken Thompson, was actively involved in directing aggressive steps to correct the processes related to this situation. We are confident that the changes weâve implemented will help protect our customers.â Some advocates cautiously applaud the bankâs efforts. âThis could be very good news for millions of consumers,â said Kathleen Keest with the Center for Responsible Lending, a group working to eliminate abusive financial practices. âBut reforms tend to happen quickly in the light of publicity, followed by backsliding when the spotlight fades,â Ms. Keest added. One of the lawyers handing the Pennsylvania suit said Wachovia should do more. âI donât understand why, like other banks, Wachovia simply doesnât have a policy to avoid any business related to telemarketers,â said Howard Langer, of the firm Langer, Grogan and Diver. A Wachovia spokeswoman said the bank was not currently working with any telemarketers, would review any future clients who do work with telemarketers, and would reject any client solely focused on telemarketing. In the last three years, government agencies have sued several companies accused of routing telemarketing thefts through at least nine banks, including Wachovia, the largest company named in those lawsuits. However, Wachovia and most other banks accused of involvement in similar frauds have never been publicly fined or prosecuted by federal regulators for aiding telemarketing criminals. So some victims have turned to private lawsuits. The Pennsylvania suit against Wachovia alleges that the bankâs involvement with telemarketing thefts dates to October 2003, when Wachovia was warned by another bank that a Wachovia client named AmeriNet had tried to process more than $100,000 in improper withdrawals. AmeriNet was a âpayment processor,â a company that creates unsigned checks on behalf of telemarketers to withdraw funds automatically from customer accounts. Such checks, once widely used by businesses collecting monthly fees, are legal if customers approve the transactions. However, a Wachovia executive wrote to colleagues, evidence suggested AmeriNet was creating unapproved checks. âKeep in mind historically, telemarketing is an easy way to money launder and commit fraud. To knowingly bank a customer who is perpetrating fraud places the bank at great exposure,â wrote that executive, Tim Brady, according to documents that are part of the lawsuit. Mr. Brady, who did not return phone calls, recommended closing the AmeriNet account in 2003, according to that e-mail message. But Wachovia continued working with the company until 2005, when AmeriNet paid $50,000 to settle complaints filed by the attorneys general of five states. Wachovia was not named in those complaints. In late 2003, a Wachovia executive announced to colleagues via e-mail that her unit, because of AmeriNet, had seen âan increase in our annual revenue projection.â Wachovia declined to comment on those e-mail messages, citing pending litigation. Wachovia also worked with other payment processors, according to court documents. In 2004, Wachovia held a lunch for the owner of a payment processor that the bank knew had drawn thousands of previous complaints. âIt is important that our relationship is firm and in good standingâ with the owner of that company, Your Money Access, wrote the Wachovia executive, Ms. Pera, to colleagues. Your Money Access was sued last year by the Federal Trade Commission and seven states on suspicion of helping to steal up to $69 million. There were other internal warnings, as well. In 2005, a Wachovia fraud investigator wrote to colleagues that 79 percent of the checks submitted by one Wachovia client, Suntasia, had been returned in August because of unauthorized withdrawals and other problems. Regulators say return rates in excess of 2.5 percent is evidence of potential fraud. âI have good reason to believe that all of the deposited items are unauthorized drafts,â wrote the fraud investigator, Bill McCann in a 2005 e-mail message. But Wachovia continued doing business with Suntasia until last year, when the company was shut down by a court order, according to the lawsuit. Wachovia declined to comment on Mr. McCannâs e-mail. Mr. McCann declined to return calls. Moreover, executives at other banks, including Bank of America, Wells Fargo, Citizens Bank, the Social Security Administration and the Justice Department Federal Credit Union also warned Wachovia multiple times that its accounts were being used for fraud, according to the lawsuit against the bank. In 2006, an executive at Citizens Bank wrote via e-mail that thieves were routing unauthorized checks through Wachovia that stole from Citizens account holders. âWe have spoken to many of our customers who have been victimized by this scam,â wrote the Citizens executive, according to court documents. âWe would appreciate it if you would shut down accounts of any customers of yours that may be engaging in improper activity.â But Wachovia kept that account open until it was frozen by a federal court a few weeks later, as part of a government lawsuit against the client. A Wachovia spokeswoman said that in every case where a bank complained, an investigation was opened and that some accounts were closed. But court records show that many of those accounts stayed open for years after the complaints were received. Last June, after Wachoviaâs involvement with telemarketing thefts was reported by The Times, Congressional lawmakers, including Representative Edward J. Markey, Democrat of Massachusetts and senior member of the House Energy and Commerce Committee, asked five regulatory agencies to answer questions regarding the unsigned checking system that fraud artists used. Senator Tom Harkin, Democrat of Iowa, also asked the Senate Banking Committee to investigate the issue. Many of those agencies responded by saying they lacked jurisdiction. âClearly, more needs to be done to prevent fraud in this area,â Mr. Markey said in a statement. A spokeswoman for Mr. Harkin said lawmakers were considering hearings. Other regulators say the banks are to blame. âThese types of crimes only are possible because banks tolerate them,â said the United States attorney in Philadelphia, Patrick L. Meehan, who prosecuted a payment processor accused of using Wachovia accounts to steal more than $100 million. âWho knows how many other crimes like this are occurring every day without anyone realizing it?â Mr. Meehan said.