A federal appeals court ruled that Bank of America Corp. , HSBC Holdings Plc and Sterling Bancorp must defend against a lawsuit related to a lawyer’s Ponzi scheme that defrauded Orthodox Jews and others out of millions of dollars.A three-judge panel of the U.S. Second Circuit Court of Appeals on Tuesday reinstated state law claims brought by dozens of investors alleging that the banks were negligent, and aided and abetted a breach of fiduciary duty.

The case involved David Schick, a Brooklyn, New York, real estate lawyer who in the early 1990s convinced investors that he had devised a “no-risk” scheme to generate high returns by bidding on and subsequently selling pools of mortgages.

According to the appeals court, investors would advance funds to Schick, who would then claim to deposit them in escrow accounts at Fleet Bank, now part of Bank of America; Republic National Bank, now part of HSBC; and Sterling National Bank.

Instead, the court said Schick raided the accounts, stealing $82 million before his fraud was discovered.

Investors claimed that the banks were liable because they failed to report overdrafts on Schick’s accounts to a state bar committee overseeing client funds, even though he repeatedly bounced checks.

“The fact that Schick was overdrawing his fiduciary accounts constituted strong evidence that he was, at the very least, mishandling his clients’ funds,” Chief Judge John Walker wrote for the appeals panel.

“Banks do have a duty to safeguard trust funds deposited with them when confronted with clear evidence indicating that those funds are being mishandled,” the judge added.

Bank of America spokeswoman Shirley Norton said the No. 2 U.S. bank intends to “vigorously defend itself” in the case. HSBC spokesman Stephen Cohen declined to comment. Sterling did not immediately return a call seeking comment.

Schick, who was well known in New York’s Orthodox Jewish community, in 1997 pleaded guilty to criminal charges in connection with his scheme.

Now 46, Schick is scheduled to be released from a federal prison in Otisville, New York, in November 2011, a spokesman for the U.S. Bureau of Prisons said.

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Source: BSC