A few weeks ago, we wrote an article discussing two enforcement actions by the Federal Trade Commission in the Central and Southern Districts of California that highlighted the risks to payment processors and financial institutions for their relationships with companies engaged in allegedly unlawful “negative option” marketing.

In both FTC v. Triangle Media Corporation et al. (the “Triangle Action”) and FTC v. Apex Capital Group, LLC (the “Apex Action”), the FTC accused the defendants of engaging in an alleged scheme to offer fake “free trials” of personal care products and dietary supplements to obtain consumers’ credit and debit card information.

Also, in both cases, the court granted the FTC’s request and recommendation that a Receiver be assigned to oversee, manage, and preserve the assets of both sets of defendants. That Receiver then sued Wells Fargo—the bank used by the defendants in both the Triangle and Apex Actions—alleging that Wells Fargo engaged in illicit activity, including, but not limited to, aiding and abetting fraud, conspiracy to commit fraud, breach of fiduciary duty, negligent supervision, and violating the California Unfair Competition Law (UCL). Last week the court denied most of Wells Fargo’s motion to dismiss, allowing the claims against the bank to proceed.

Specifically, the complaint alleged that Wells Fargo’s alleged “high-pressure sales culture” drove Wells Fargo bankers to use “atypical banking procedures,” including:

  • Ignoring red flags that Apex’s and Triangle’s deposit accounts were being set up for shell companies for a high-risk internet business (i.e., accounts funded with minimal deposits and corporations found in states requiring no identification of beneficial owners)
  • Ignoring high chargeback rates
  • Accepting fraudulently obtained funds
  • Failing to follow Wells Fargo policies and U.S. banking regulations that could have revealed the fraud

On July 8, 2021, Wells Fargo moved to dismiss the complaint on several grounds, including that the Receiver could not plausibly allege facts showing that Wells Fargo actually knew about, or substantially assisted in, Apex’s or Triangle’s schemes.

On March 30, 2022, the court issued an order granting, in part, and denying, in part, Wells Fargo’s motion to dismiss. The court refused to dismiss the Receiver’s claims for aiding and abetting the Defendants’ fraud, rejecting Wells Fargo’s argument that there is a higher standard of pleading required for a bank, based on its customers’ activities. The court further found that the circumstantial evidence outlined in the complaint could provide a reasonable inference that Wells Fargo possessed the required actual knowledge of Apex’s and Triangle’s activities. Additionally, the court found the Receiver had pleaded that Wells Fargo substantially assisted Apex’s and Triangle’s fraud, as required to ultimately prove an aiding and abetting claim. The court reasoned that the complaint adequately alleged that Wells Fargo provided this assistance by participating in extraordinary business transactions, including knowingly opening accounts with straw owners, contrary to industry practice, and issuing reference letters without ownership information.

The court also refused to dismiss the Receiver’s claims for aiding and abetting defendants’ breach of their fiduciary duties. In short, the court found that the complaint sufficiently alleged that Wells Fargo knew that the individual defendants were owners or officers of the defendant corporations. The court reasoned that knowledge of the individual defendants’ positions would be sufficient to find that Wells Fargo had actual knowledge of the individual defendants’ fiduciary duties, and, as outlined above, there could be a reasonable inference that Wells Fargo knew that those fiduciary duties were being violated by fraudulent activity.

In addition, the court allowed four other claims to survive Wells Fargo’s motion to dismiss:

  • It found that the allegations concerning Wells Fargo’s knowledge of credit card laundering were enough to satisfy the pleading requirements for a claim of aiding and abetting conversion.
  • It rejected Wells Fargo’s argument that aiding and abetting a fraudulent transfer is not a recognized cause of action in California.
  • It found the complaint contained the allegations necessary to evidence a specific tacit agreement to further the defendants’ fraud, which is enough to support a conspiracy claim.
  • It denied the motion to dismiss the Receiver’s claim for an accounting because it found that any plaintiff, regardless of fiduciary relationship or the complexity of the accounts, may be entitled to an accounting where fraud is alleged.

Not all was lost for Wells Fargo, however. The court reasoned that Wells Fargo could not be found negligent because there is no general duty for Wells Fargo to prevent one depositor from perpetrating fraud against another. It also found that the complaint did not support a negligent supervision claim because it lacked sufficient allegations that Wells Fargo knew that its employees had the propensity to engage in misconduct.

Additionally, the Receiver’s receipt of stolen property claim failed because the complaint’s allegations were not sufficient to infer that Wells Fargo knew the defendants were, in fact, defrauding customers, although such allegations could be sufficient to infer that Wells Fargo knew the defendants’ bank transactions were illegal. Finally, the court dismissed the Receiver’s UCL claim because the complaint did not allege that the Receiver had no adequate remedy at law, which is required to obtain equitable relief under the UCL.

The fact that so many of the Receiver’s claims survived the motion to dismiss highlights the risks to financial institutions arising from their customers’ alleged conduct and the need for sufficient customer onboarding programs and continuing oversight.

Venable has advised numerous payment processors and financial institutions regarding compliance policies and consumer monitoring efforts, including regarding compliance with advertising and marketing laws. For more insights into advertising law, bookmark our All About Advertising blog and subscribe to our monthly newsletter.