A federal judge in New York ruled that the state’s attorney general could move forward with her arguments that Citi failed to protect and reimburse victims of wire fraud, in a case primarily about whether banks must reimburse victims of wire fraud for their losses — just as they do in cases of fraudulent purchases.
The judge, J. Paul Oetken of the U.S. District Court for the Southern District of New York, did not make any findings Tuesday about the truth of claims brought by Letitia James, the New York attorney general. Rather, he determined that if the factual claims are true, James has cause to sue Citi on certain grounds.
Notable among these factual claims are that Citi made it easier for fraudsters to access consumers’ accounts through relaxed security protocols as authorized by its customer agreements, that the bank delays wire-fraud investigations and that those investigations are ineffective and lead victims to sign affidavits that put themselves rather than the bank at fault.
While the order does not put Citi at fault for denying reimbursements for wire scams and fraud, it does put the company, which said it implements industry-standard practices, in a position to continue arguing that it has no liability for wire fraud — and paying for the legal costs to make that argument.
Specifically, the order found that Citi’s arguments in its motion to dismiss were too weak — that it would need to continue defending its case or find new arguments as the case moves into the next stage.
James represented the order, which partially dismissed her case and partially allowed it to move forward, as a win.
“When New Yorkers deposit their money in a bank, they expect it to be kept safe from scammers and thieves,” James said in a press release following the order. “Citi’s failures to protect its customers’ accounts are costing New Yorkers millions of dollars. Today’s decision will allow us to continue our case against Citi to help those whose savings were stolen and ensure the bank follows the law to protect its customers.”
A spokesperson for Citibank said the company was “disappointed” in the decision because “the industry-standard practices we employ have long been recognized as satisfying applicable law.” The spokesperson said the bank was “evaluating next steps in the litigation.”
The bank had argued that it was not liable for unauthorized intrabank transfers that take place during a wire-transfer scam because the Electronic Funds Transfer Act (EFTA) explicitly exempts wire transfers from its fraud protections coverage. In other words, consumers do not enjoy fraud protections for wire transfers, even as they enjoy protections against other fraudulent transfers, such as those made via automated clearinghouse (ACH).
So, in cases where a scammer transfers money from a consumer’s savings account to their checking account in the process of a wire fraud, Citi argued that even as intrabank transfers are protected in some cases, intrabank transfers made in the process of a wire transfer are not. Oetken disagreed with Citi’s initial arguments and allowed James to continue arguing her side on the matter.
The bank had also argued that consumers receive a benefit when scammers conduct an unauthorized intrabank transfer — i.e., when a scammer moves money from a victim’s savings account to the victim’s checking account — because consumers do not lose these funds; they just move from one account the consumer controls to another.
Whether a consumer benefits from intrabank transfers is crucial to the case because the EFTA protects consumers when an unauthorized transfer is initiated, so long as the consumer “receives no benefit” from the transaction. Again, Oetken disagreed with Citi’s initial claim, allowing James to move forward in her arguments on the matter.
Oetken dismissed some of the other claims James had brought against Citi, namely those in which she sought to use New York state laws to hold Citi liable for wire transfer fraud committed against its customers. Oetken also dismissed a claim James had made that Citi violated the Uniform Commercial Code, a federal law, because payment orders were subject instead to the EFTA, also a federal law.
Finally, Oetken partially dismissed and partially granted Citi’s motion to dismiss three other claims, one related to the EFTA and one related to New York’s fraud and deception laws.
Specifically, Oetken allowed James to move forward with her claim that Citibank’s user agreement unlawfully limits the bank’s need to meet a burden of proof in alleged cases of EFTA violations related to wire transfers.
He also allowed two claims to move forward that Citibank made incorrect statements, first to specific customers about the security of their accounts, and second to all customers about their rights under the EFTA — namely, that Citibank incorrectly told customers that they needed an affidavit before Citibank conducted an investigation or issued provisional credits or reimbursements.
