Court Ruling: Banks Not Liable for Fraud Against Non-Customers in Crypto Scam

Court Ruling Leaves Crypto Scam Victims in the Lurch as Banks Escape Liability

In a landmark decision that has sent shockwaves through the investment community, a federal appeals court has ruled that banks have no obligation to protect non-customers from fraud, leaving over 150 investors reeling after losing a staggering $33 million in a cryptocurrency scam.

On February 10, the United States Court of Appeals for the Second Circuit delivered the verdict, raising concerns about the role banks play in monitoring suspicious transactions. The case centered around a fraudulent cryptocurrency trading club, Q3 I, L.P., launched in 2018 by three promoters who promised investors substantial returns through a proprietary algorithmic trading strategy. However, the reality was far from the claims: there was no algorithm, no trading strategy, and certainly no cryptocurrency trading taking place.

Instead, the scheme was a straightforward theft. Funds deposited into the partnership’s account at Signature Bank were quickly funneled to insiders, including Michael Ackerman, one of the scheme’s architects. Over two years, the partnership made only six transfers to cryptocurrency exchanges, while the vast majority of the funds disappeared into the pockets of Ackerman and his associates.

The fraud was perpetuated by fabricating profits, allowing the general partner to withdraw half of the supposed trading gains—gains that never existed. When investors finally realized they had been duped, they turned to Signature Bank, arguing that the bank should have recognized the suspicious flow of money.

In late 2020, Q3 Investments Recovery Vehicle, representing 73 defrauded investors, filed a lawsuit against the bank. However, by the time the case reached the appeals court, Signature Bank had failed and was under the control of the FDIC.

The court’s ruling was clear: banks do not have a duty to protect non-customers from fraud committed by their customers. While there are exceptions for fiduciary accounts, the court determined that the partnership’s account did not meet this criterion. The judges emphasized that investing in a partnership does not create a trust relationship between the bank and the investors.

This decision leaves the defrauded investors with little recourse, as they now must pursue the individuals who orchestrated the scam without any support from the financial institution that facilitated the fraudulent transactions. As the dust settles, the ruling raises critical questions about the responsibilities of banks in safeguarding against fraud and the protections available to investors in the rapidly evolving world of cryptocurrency.