When Banks Face Ponzi Scheme Liability

Introduction

The U.S. District Court for the Western District of Washington denied Columbia Bank’s motion to dismiss claims that it aided and abetted a Ponzi scheme that allegedly defrauded more than 1,800 investors of approximately $230 million. The court held that the complaint plausibly alleged actual knowledge and substantial assistance based on Columbia’s KYC and enhanced due diligence (“EDD”) reviews, high-risk designations, visibility into account flows, commingling, and transfers to a principal’s personal accounts. The ruling is an outlier because it permitted the claims to proceed on allegations that the bank’s own compliance processes and continued servicing indicated that it knew of and assisted the scheme.

Actual knowledge, substantial assistance, and causation turn on whether the complaint connects information generated by the bank’s own processes—and the bank’s response to that information—to a specific fraud and investor losses.

Overview of the Western District of Washington Case

The Columbia Bank case grew out of a separate bankruptcy proceeding involving iCap, the affiliated real estate investment enterprise whose accounts Columbia allegedly maintained during the relevant period. In that proceeding, the Bankruptcy Court found that iCap operated as a Ponzi scheme, raising approximately $230 million from more than 1,800 investors. The iCap Trust was later created to pursue claims assigned to it by those investors, including the civil aiding-and-abetting claims against Columbia Bank.

The Trust then sued Columbia Bank (formerly Umpqua Bank), alleging that the bank aided and abetted iCap’s fraud and the principals’ breaches of fiduciary duty. Columbia moved to dismiss, arguing that the complaint did not plausibly allege actual knowledge or substantial assistance through compliance reviews, account monitoring, or continued banking services.

KYC, EDD, and transaction visibility

The complaint tied Columbia’s institutional knowledge to its KYC and AML processes, which required the bank to understand iCap’s business, assess risk, and monitor activity. Columbia classified iCap’s accounts as high risk and conducted at least 17 EDD reviews. According to the complaint, those processes generated information about the accounts’ purpose and fund flows, including records showing investor funds and approximately $585 million in withdrawals—most of which involved investor returns or intercompany transfers—yet Columbia continued to provide services.

Commingling, personal transfers, and alleged assistance

The complaint alleged that iCap commingled investor funds and moved them among related entities and personal accounts without a valid business purpose. Columbia allegedly knew of those movements, helped cover deficits, processed thousands of transactions, and kept the accounts open.

Claims and ruling

Columbia moved to dismiss for lack of standing and failure to state claims for aiding and abetting fraud and breach of fiduciary duty. The court denied the motion, holding that the complaint plausibly alleged the underlying fraud and satisfied Rule 9(b) without naming every investor who assigned a claim, given the scheme’s scale and complexity. It found actual knowledge plausibly alleged through Columbia’s KYC and EDD reviews, high-risk classifications, records showing investor funds, visibility into fund flows, commingling, and personal-account transfers; substantial assistance was plausibly alleged through facilitated transfers, failure to investigate further, and continued transaction processing and retention of the relationship. The same allegations supported the fiduciary-duty claim because they linked Columbia’s institutional knowledge to services allegedly furthering the fraud—not merely to red flags or routine banking activity.

The Opposite End of the Spectrum: Western District of New York

By contrast, in 2020, the Western District of New York granted motions to dismiss claims against Bank of America and Citizens Bank for aiding and abetting fraud and breach of fiduciary duty, as well as common-law conspiracy. As discussed in a prior Mintz alert, the court found that the complaint failed to plausibly allege actual knowledge or substantial assistance. These decisions show that similar banking activity can produce different outcomes depending on whether the complaint links the bank's own processes and response to a specific fraud.

Factual differences

Plaintiffs primarily relied on allegations that a branch manager opened accounts, expedited access to funds, released holds, misrepresented account balances, accepted a personal loan from the scheme operators, and continued the relationship after moving to the other bank.

Actual knowledge

Those allegations did not establish actual knowledge. Atypical transactions, suspicious activity, an internal investigation, and the manager’s alleged misrepresentations might have raised suspicions, but the complaint did not allege that either bank knew of the fraud or that the investigation uncovered it. Nor did it allege that the banks reviewed investor offering materials or had clear evidence that the accounts held investor funds. The Washington complaint instead relied on information from Columbia’s own KYC, EDD, document-review, and monitoring processes.

Substantial assistance, causation, and pleading sufficiency

The same distinction applied to substantial assistance and causation. New York treated account openings, wire transfers, hold releases, and other banking services as routine—even when atypically frequent—and found no non-speculative link between the manager’s conduct and investor losses. The Washington complaint instead alleged that the bank’s compliance processes generated information supporting actual knowledge of the scheme and that the bank continued providing services and processing transactions. Both courts applied heightened fraud-pleading requirements, but only the Washington complaint linked the relevant who, what, when, where, and how to the bank’s knowledge and response.

Policy reasoning

New York stressed that banks generally need not investigate the source of every deposit or face liability for customers’ intentional torts. Washington focused on allegations that Columbia’s compliance work identified the nature and movement of investor funds, making continued services and processing potentially actionable. The dividing line is whether the complaint links the bank’s institutional knowledge and response to a specific fraud and investor loss—not banking activity in the abstract.

What the Landscape Looks Like for Banks

Factors supporting dismissal

Dismissal is more likely when a complaint relies on generalized red flags, atypical transactions, or an employee’s relationship with a customer without linking those facts to the bank’s knowledge of a specific tort or investor harm. Routine services, without more, do not establish substantial assistance. The absence of investor offering materials, evidence tracing funds to investors, or an internal review that exposed fraud may weaken the inference of actual knowledge.

Factors creating pleading-stage exposure

Exposure increases when allegations tie knowledge to the bank’s own compliance systems and specify what it learned, when, and how it responded. The Washington opinion identifies repeated EDD reviews, high-risk classifications, records showing the customer’s business and sources of funds, identifiable inflow and outflow patterns, commingling, transfers to personal accounts, specific allegations of the bank’s involvement, and continued transaction processing or retention of the relationship despite those concerns. The central question is whether the complaint plausibly alleges that the bank knew the transfers furthered a specific fraud, not merely that they appeared suspicious.

Additional decisions along the spectrum

• In Camenisch v. Umpqua Bank, No. 20-cv-05905-RS, 2021 WL 9181171 (N.D. Cal. Jan. 28, 2021), the court denied dismissal of claims arising from an alleged real-estate Ponzi scheme, holding that knowledge may be pleaded generally under Rule 9(b) and that ordinary banking transactions may constitute substantial assistance when the bank allegedly knows they further a specific tort. Allegations that the bank was aware of the scheme and continued servicing the accounts sufficed at the pleading stage.
• In In re J&J Investment Litigation, No. 2:22-cv-00529-GMN-NJK (D. Nev. Mar. 18, 2023), the court denied dismissal of aiding-and-abetting fraud, aiding-and-abetting breach of fiduciary duty, and Uniform Fiduciaries Act claims. It found that an IOLTA account inconsistent with proper trust-account use and internal monitoring reports supported an inference of actual knowledge, while continued transactions supported substantial assistance.
• In In re TelexFree Securities Litigation, MDL No. 4:14-md-02566-TSH (D. Mass. Aug. 31, 2022), claims against two banks survived because the allegations linked serious red flags to the later processing of a significant transfer. The claim against PNC was dismissed because the complaint did not explain how PNC processed or responded to those red flags. Routine services are not dispositive without that link.
• In O’Dell v. Berkshire Bank, No. 5:24-cv-00652 (N.D.N.Y. Oct. 31, 2024), the court dismissed with prejudice a putative class action alleging aiding-and-abetting fraud. It held that an unusually active account, the bank’s KYC and AML programs, alleged failures to investigate, and routine account openings and transfers did not establish actual knowledge or substantial assistance.
• Isaiah v. JPMorgan Chase Bank, N.A., 960 F.3d 1296 (11th Cir. 2020), adds a standing limitation: the Eleventh Circuit affirmed dismissal because a receiver could not assert aiding-and-abetting claims on behalf of entities that were themselves instruments of the Ponzi scheme. It also rejected a FUFTA transfer claim based on routine transfers among entity accounts because the entities retained control of the funds. Standing and claim ownership may therefore foreclose bank claims before the court reaches actual knowledge or substantial assistance.

Banks should maintain clear records of compliance judgments and relationship decisions, including the purpose and outcome of KYC and EDD reviews, risk classifications, responses to alerts, and decisions to maintain or exit a relationship. Records should distinguish routine processing from individualized conduct alleged to facilitate transfers or conceal problems. Attribution and causation remain distinct: employee conduct alone may not be imputed without institutional knowledge, while institution-wide reviews and continued services may be alleged as evidence of both knowledge and assistance.

Conclusion

The cases underscore that bank-liability claims are fact-sensitive at the pleading stage. Claims are more likely to survive when a complaint links the bank’s compliance or monitoring processes to actual knowledge of a specific fraud and identifies services or relationship decisions that allegedly furthered it. They are more likely to be dismissed when the complaint relies on generalized red flags, routine banking activity, constructive knowledge, or a speculative causal link. Standing and claim ownership may independently foreclose claims. For banks, the central risk is that compliance activity, transaction processing, and relationship decisions may later be characterized as evidence of both knowledge and assistance; attribution and causation remain distinct issues.
 

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