Hundreds of Northern California investors who allege Umpqua Bank backed a $450 million Ponzi scheme will soon get their days in court.
A roughly three-week jury trial is scheduled to begin Monday in a San Jose federal courtroom.
The investors allege Umpqua knew one of its clients was operating a Ponzi scheme and instead of stopping the fraud “chose to profit from it.” Umpqua has repeatedly said it had “no knowledge” of the scheme.
A judge certified the lawsuit as a class action in December 2022.
The dispute stems from the collapse of Professional Financial Investors and Professional Investors Security Fund, two Bay Area real estate investment companies that raised hundreds of millions of dollars from more than a thousand investors, many of them “local mom and pop investors,” according to the lawsuit.
Linda Lam, an Oakland-based attorney for plaintiffs, said the roughly 1,200 investors in the class seek upwards of $360 million in damages. Plaintiffs have already recovered $110 million through bankruptcy proceedings, according to Umpqua’s securities filings.
Lam said most of her clients are individual investors who heard about Professional Financial Investors through word of mouth.
“Many of them are retirees who invested most of their life savings with PFI and were relying on monthly distribution payments from PFI for their normal living expenses,” Lam said.
The companies collapsed after their founder, Kenneth Casey, died in 2020. A year later, his business partner, Lewis Wallach, was sentenced to 12 years in prison after he pled guilty to fraud and embezzlement and acknowledged the companies used money from new investors to pay existing investors after they fell behind on payments.
Professional Financial Investors banked with Northern California’s Circle Bank, which was acquired by Umpqua Bank in 2012. Columbia Bank acquired Umpqua in 2023 and retained the Umpqua name.
Umpqua called the lawsuit an “overreaching attempt” to recover additional losses. In court papers, it’s also noted the high bar needed to hold a bank accountable for the actions of a customer.
“We will vigorously defend our bank against claims related to the scheme orchestrated by convicted felon Lewis Wallach and his deceased co-conspirator Ken Casey,” the bank said in a statement. “Umpqua Bank should not be held responsible for the criminal acts of Lewis Wallach and Ken Casey, and we look forward to presenting our case to the jury.”
Umpqua’s motion to dismiss the lawsuit was denied in January 2021. In December 2022, U.S. District Judge Richard Seeborg certified the lawsuit as a class action.
In his order making the lawsuit a class action, Seeborg noted Umpqua’s fraud-detection software issued 146 alerts for suspicious activity and possible fraud at PFI between June 2018 and April 2020.
The number of alerts should have gotten the attention of the bank’s fraud investigators, said Suzanne Lynch, an adjunct professor of financial crime at Utica University.
Lynch, who previously worked in fraud-detection for several large financial institutions, said Umpqua’s lawyers will need to explain to jurors how its fraud-detection system works and what it did to investigate the alerts. But she also acknowledged some of the alerts might have been meaningless.
“The biggest problem with a lot of fraud detection is false positives,” Lynch said.
In a statement, Umpqua said 146 is a “minute fraction” of PFI’s banking transactions.
“PFI was a substantial operating business with over 70 buildings, renting thousands of units to tenants, with hundreds of thousands of transactions running through its deposit accounts,” the bank said.
Umpqua also noted Wallach already testified he and Casey “actively” hid the Ponzi scheme from the bank.
“The bank had no knowledge of their scheme,” Umpqua said.
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