Legal: Court frees Signature Bank from liability in $33M crypto Ponzi scheme

A federal appeals court just told over 150 investors who lost $33 million in a crypto scam that their bank had no duty to stop it.

The ruling came down February 10 from the United States Court of Appeals for the Second Circuit, and it should worry anyone who thinks banks are watching out for obvious fraud running through customer accounts.

Here's what happened. In 2018, three promoters launched what they called a cryptocurrency trading club. They told investors they had developed a proprietary algorithmic trading strategy that would generate serious returns. More than 150 people bought into the pitch, investing over $33 million through a limited partnership called Q3 I, L.P.

The problem? There was no algorithm. There was no trading strategy. There was no cryptocurrency trading at all.

What actually happened was straightforward theft. Money came into the partnership's account at Signature Bank, then moved almost immediately to accounts controlled by insiders like Michael Ackerman, one of the scheme's architects. Over two years, the partnership made exactly six transfers to any cryptocurrency exchange. Everything else went straight into the pockets of Ackerman and his associates.

The fraud worked because the promoters lied about profits. Under the partnership agreement, the general partner was entitled to half of all trading gains. So, Ackerman and others fabricated enormous returns, then pulled money out of investor accounts as their supposed share of profits that never existed.

When investors finally figured out they had been scammed, they went after Signature Bank. Their argument made intuitive sense: the bank processed all these suspicious transactions and should have noticed something was wrong. Money was pouring in from investors and flowing right back out to insiders, with almost nothing going to the cryptocurrency exchanges where trading was supposedly happening.

Q3 Investments Recovery Vehicle, representing 73 of the defrauded investors, sued the bank in late 2020. By the time the case reached the appeals court, Signature Bank had failed and the FDIC had taken over as receiver.

The court said banks simply don't have a duty to protect people who aren't their customers from fraud perpetrated by people who are. There's an exception for fiduciary accounts, where banks are expected to watch for misappropriation, but the court said this wasn't that kind of account.

The investors argued the account should have been treated as fiduciary because it held money managed on behalf of others. The court wasn't buying it. When you buy a partnership interest, you're not placing money in trust. You're making an investment. The fiduciary relationship, if any, was between the general partner and the limited partners, not between the partnership and its investors.

The court also pointed to federal law protecting the FDIC from claims based on informal understandings. Even if bank employees somehow thought this was a fiduciary account, there was nothing in writing to that effect.

The decision leaves defrauded investors chasing the people who actually stole their money, with no help from the institution that made the theft possible.