Judge advances claims against banks in crypto Ponzi scheme case

PORTLAND, Ore. (CN) — An federal judge in Oregon ruled Thursday morning that state securities law and joint liability claims can proceed against three banks that accepted deposits and processed transfers for a group charged with operating a Ponzi scheme.

In 2022, the Commodities and Futures Trading Commission filed an enforcement action a Portland man named Sam Ikkurty and his business partner Ravishankar Avadhanam, accusing them of organizing a $44 million cryptocurrency Ponzi scheme through their company Jafria. The scheme defrauded at least $18 million from 170 individuals through the unlawful sales of securities.

Amit Fatnani, an individual who lost $350,000, filed a class action in 2023 to hold six separate banks and financial companies accountable for their roles in the Ponzi scheme. Fatnani claims each of the defendants either participated or provided material aid to the Ponzi scheme organizers, and that the scheme would not have been possible without the banks’ participation. Fatnani brought three state law securities claims and one common-law claim of joint liability for tortious conduct.

In his complaint, Fatnani claimed that the Ikkurty and his business partner’s’ transactions were in large, round numbers, and often-repeated dollar amounts, a transfer pattern indicative of money-laundering activities. This was all done without indicators of normally-expected activity in the bank accounts of a legitimately and lawfully functioning crypto currency investment company, according to Fatnani.

U.S. District Judge Michael Simon, a Barack Obama appointee, ruled Thursday that all four claims survive against two of the banks, KeyBank and Columbia Banking System, because their acceptance of deposits amounted to participating in the scheme, while only joint liability claims survive against JPMorgan Chase.

The banks argued their acceptance of deposits and processing of transfers did not amount to providing material aid to the scheme.

Fatnani claimed, however, that his purchase of an interest in a fund was not complete until he wired funds to an account at KeyBank, and that his purchase of a promissory note was not complete until funds were received and accepted for deposit by Columbia.

“It is unclear how a sale under such an agreement could be complete without a bank accepting funds for deposit. For these reasons, the court rejects the bank defendants’ argument that acceptance of deposits cannot constitute ‘participation’ or ‘material aid’ in the sale of a security within the meaning of the Oregon securities law,” Simon wrote in his 46-page order.

JPMorgan Chase dodged the Oregon securities law claims because the only accounts Ikkurty and his partner opened at the bank to further the scheme were not opened until after the sales of securities to the plaintiffs were complete.

“Even assuming plaintiff can show that JPMC’s alleged participation or material aid in the sales of securities to other class members caused plaintiff a cognizable injury, the provisions of the Oregon securities law that might impose liability for those sales would not support plaintiff’s claims against JPMC,” Simon wrote.

As for the joint liability claims, all three banks urged dismissal because they did not have “actual knowledge” that the funds were used for a Ponzi scheme, and that routine banking activities of depository institutions, such as receiving investor funds and processing distributions, do not constitute “substantial assistance” to the scheme.

Simon disagreed, however, writing that he was satisfied at this point that Fatnani’s amended complaint was sufficient for the claims to survive.

“Plaintiff alleges that the bank defendants knew that members of the Jafia Group were breaching their fiduciary duties, and that the bank defendants ‘provided substantial assistance and encouragement to these breaches’ by receiving investor funds for deposit and continuing to process distributions of investor capital ‘in order to perpetuate the scheme,’” Simon wrote.

Counsel for the Fatnani and the banks did not respond to requests for comment before this story was published.