Private judge, not jury, will hear City National Bank Ponzi case

A private judge, not a Los Angeles jury, will render a verdict in the lawsuit seeking more than $770 million in damages from City National Bank over its alleged role in aiding a Ponzi scheme led by actor Zachary Horwitz.

U.S. District Court Judge Christina Snyder recently ruled in favor of a request by the Los Angeles bank to have the case handled by a “judicial referee,” an alternative form of dispute resolution that is similar to arbitration.

In arbitration, which has been criticized for its use by corporate and sexual harassment defendants to hide findings of wrongdoing, hearings are private and the judgments typically final and not made public. By contrast, hearings before judicial referees are technically open to the public, with the judgments also public and subject to appeal.

However, judicial referees can be an attractive option to defendants facing potentially large verdicts since the positions are typically filled by former judges — the kind of arbiters generally seen as being less likely than juries to return multibillion-dollar runaway verdicts.

“It is far less likely, in general, to inflame the passions of a retired judge who has significant experience in handling cases than it is to a jury who, in a lot of instances, this is their one and only case they are ever sitting on,” said attorney John Nadolenco, managing partner of Mayer Brown’s Los Angeles office.

The lawsuit was filed in February by a court-appointed receiver who is trying to recover losses incurred by investors in a Ponzi scheme led by Horwitz, a small-time actor who claimed he had a business acquiring film rights and licensing them to Netflix and other streaming platforms for foreign distribution.

Horwitz, who appeared in a handful of films under the stage name Zach Avery, had no such deals and forged contracts and emails to dupe investors, who poured more than $700 million into the scheme from 2013 through 2019, when by the end of the year Horwitz had trouble raising money. He was arrested in 2021, pleaded guilty to securities fraud and was sentenced to 20 years in prison, owing some $230 million in restitution.

In the lawsuit, receiver Michele Vives alleged the bank “substantially assisted” Horwitz by “adding an air of legitimacy” to the scheme and — driven by a desire to earn interest on a line of credit and sell Horwitz other services — “bent the rules” and accepted “incomprehensible explanations” about the sources of the funds and the flow of money in the accounts.

The bank said that the case should not be heard by a jury because the terms of the business accounts Horwitz opened at the bank for his company, 1inMM Capital, and related entities allow the bank to have judicial referees resolve disputes. Vives’ attorney unsuccessfully argued that the agreement did not apply to the receiver and that, in any case, the judge had the discretion on whether to appoint a referee. Snyder issued her ruling July 25.

City National defended its decision to block the case from going to a jury.

“Although City National does not comment in detail on pending litigation, we consistently abide by the terms of our agreements. City National will continue to defend itself vigorously and strongly disagrees with the receiver’s allegations,” the bank said in a statement.

An attorney for Vives declined to comment, saying the receiver does not talk about active cases.

The two sides must now seek and pay for a referee to handle the litigation, which could move faster than in federal court, due to the busy calendar of district court judges. The law requires that the court post where the proceedings are held so the public can attend.

Ann Kough, a former Los Angeles County Superior Court judge who has worked as an arbitrator and judicial referee for two decades, said she has never had a member of the public attend a judicial reference hearing but that doesn’t mean the public wasn’t aware of the proceedings.

“It’s not really a matter of somebody coming into a room and wanting to listen, but they can see all the documents because they’re part of the court record,” she said.

While the City National lawsuit has the potential to recover hundreds of millions of dollars for investors fleeced in the Ponzi scheme, the receiver also is seeking to recover funds from investors who made money on the scheme before it fell apart. Those include “aggregators” who brought multiple investors into the scheme and funneled money up to Horwitz.

In addition, the receiver has reached a settlement with a professional services firm that worked with Horwitz and is in settlement discussions with a “major financial institution” that did business with him. Other potential sources of funds include the sale of films in which Horwitz invested, using the scheme’s proceeds, according to an Aug. 5 update of the receiver’s activities filed in federal court.

Tom Lochtefeld, 61, who lost $150,000 in retirement funds invested in 2019, said he was disappointed to hear that the case was being heard by a judicial referee.

“It should be fully transparent and decided by a judge and jury as far as I’m concerned,” said the Connecticut resident.