On October 9, the U.S. Court of Appeals for the 2nd Circuit affirmed a district court’s dismissal of fraud claims against a bank that provided account services to a bankrupt cryptocurrency brokerage, holding that the plaintiff failed to plausibly allege that the bank knew of the brokerage’s alleged misstatements or acted as its principal. The plaintiff, the brokerage’s plan administrator, sued as assignee of claims held by 31,867 former customers, asserting 53 claims, including fraud and securities claims, on theories that the bank directly participated in or aided and abetted the brokerage’s fraud and was vicariously liable for it. The alleged misstatements included representations that the platform was “Safe and Regulated” and statements about FDIC insurance coverage.

The court first declined to relax the particularity standard under Federal Rule of Civil Procedure 9(b), finding the administrator “possessed both the authority and the opportunity to obtain the necessary facts,” including through bankruptcy examinations and the brokerage’s internal records. The court then held that allegations of the bank’s close contact with, and oversight of, the brokerage showed at most that the bank “should have” discovered the fraud, not that it actually knew of it. A bank employee’s comment that FDIC-related language “could be ‘misleading’” concerned draft language for a future debit cardholder agreement, rather than public statements, and came with a request to discuss what disclosure, if any, was appropriate. The 2nd Circuit likewise found that internal emails about lending and market risks did not show the bank knew the brokerage’s statements were false.

The court also rejected the vicarious liability theory under New York law. Although the administrator argued that the parties’ “for-the-benefit-of” account agreement made the brokerage the bank’s representative to “market, offer[,] and sell” cryptocurrency exchange services, the court found that the agreement described the parties as “independent contractors,” limited its scope to bank-approved programs and did not give the brokerage broad authority to bind the bank.