On August 31, 2022, in a lengthy order,1 Judge Timothy Hillman of the U.S. District Court of Massachusetts denied motions to dismiss that were filed by multiple defendant banks (the "Banks") in an attempt to avoid liability for allegedly aiding and abetting a multibillion-dollar Ponzi scheme by TelexFree. While the Banks raised a variety of issues, the judge's rulings regarding the "substantial assistance" element of a tortious aiding and abetting claim is particularly noteworthy.
Ordinarily, merely pleading that a bank provided "routine" banking services would be insufficient to meet the standard for pleading substantial assistance. In a notable departure from this general principle, the court held that because the Plaintiff plausibly alleged that the banks had "actual knowledge" of their services being used to facilitate a customer's tort (in this case, fraud), Plaintiff's pleading so-called "routine services" that allegedly furthered the fraud was sufficient to survive a motion to dismiss. In addition, the court held that allegations of certain defendants' awareness of, and response to, various "red flags" and circumstances suggesting fraud was sufficient to present a strong inference of "actual knowledge," although mere awareness of certain red flags was not sufficient.
TelexFree engaged in a billion-dollar pyramid scheme—from 2012 to April 2014—whereby the company first sold $50 memberships to numerous promoters (i.e., plaintiffs) and then charged them certain amounts for the right to sell VoIP plans per month for a year. Although promoters could theoretically profit from re-selling the plans they purchased, they were impossible to sell. However, TelexFree guaranteed a return on investment, even if promoters did not actually sell a single plan. TelexFree would "buy back" unsold plans, from promoters who posted TelexFree advertisements online each day, but it paid promoters in "credits" that they could only request to withdraw as cash after they reached a certain balance.
In January 2013, Brazilian authorities reported they were investigating TelexFree for potential Ponzi scheme violations and, by June 2013, a court's ruling essentially shut down TelexFree operations in Brazil. About one year later, TelexFree told promoters they would have to sell VoIP plans to make money. At this point, promoters scrambled to withdraw their credits, with little success. The scheme came to an end in April 2014 when TelexFree filed for bankruptcy. Shortly thereafter, plaintiffs filed suit the Banks, which were providing services to TelexFree, and the Banks moved to dismiss.
Bank of America ("BofA")
In arguing for dismissal, BofA asserted that plaintiffs failed to sufficiently plead actual knowledge and substantial assistance for purposes of establishing a claim of tortious aiding and abetting.2 With respect to actual knowledge, the court found that, by late 2013, "not only had TelexFree been shut down in Brazil, but Bank of America had closed TelexFree accounts due to suspicious activity and openly informed TelexFree that it was concerned that TelexFree was operating illegally," which gave "rise to a strong inference" that BofA had actual knowledge of the Ponzi scheme.
Regarding substantial assistance, the court explained, "although [BofA's] provision of routine banking services typically [would] not constitute substantial assistance[,] . . . when a bank has actual knowledge that its routine services are assisting a customer in committing a specific tort, the provision of those services may constitute substantial assistance." The court held that plaintiffs' contention that BofA transferred $30 million to a TelexFree account at a different bank in March 2014 plausibly constituted substantial assistance, emphasizing that, by this time, "TelexFree had announced changes to its compensation model and droves of TelexFree promoters had begun to request withdrawal of their credits." The court concluded that BofA's facilitation of the transfer—months after the bank allegedly had "actual knowledge" of the scheme and one month before the scheme unraveled—"substantially aided TelexFree in absconding with victim funds." The court ultimately concluded that plaintiff had sufficiently pled a claim of tortious aiding and abetting against BofA.
Like BofA, TD Bank argued that plaintiffs had not sufficiently pled actual knowledge or substantial assistance. The court disagreed. The court focused on a number of "red flags" that TD Bank was allegedly aware of, including "suspicious transactions and high-profile websites declaring TelexFree a fraud," and TD Bank's reactions to those red flags, which included "discussions between TD Bank and TelexFree concerning the scheme's negative publicity and shutdown in Brazil". The court noted that this was not a case "where, despite certain suspicious activity, a bank failed to detect an underlying fraud." Instead, TD Bank's reactions to the "red flags," "constituted circumstantial evidence that TD Bank 'actually knew' that TelexFree was a fraud."
Regarding substantial assistance, the court concluded that plaintiffs' allegations that TD Bank provided various services for TelexFree's multiple accounts in connection with suspicious transfers were sufficient to establish that TD Bank permitted the TelexFree "insiders to abscond with funds and extend the duration of the fraud." The court stressed that, "[g]iven the inference of actual knowledge, these allegations are sufficient at the pleading stage to establish substantial assistance."
The court granted PNC Bank's motion to dismiss because the plaintiffs did not sufficiently allege actual knowledge. According to the court, "[i]n contrast to other bank defendants, such as [BofA], there [we]re no allegations relating to how PNC processed or responded to the red flags" (e.g., no assertions that PNC Bank terminated TelexFree accounts based on suspicious activity) and, as a result, the pleading was inadequate to support a strong inference of actual knowledge.
The court's decision suggests that, where a plaintiff pleads circumstances supporting a strong inference of actual knowledge in a tortious aiding and abetting claim, the court is willing to relax the pleading standard for substantial assistance. When faced with a tortious aiding and abetting claim, arguing that the services provided by the defendant were "routine" may no longer be sufficient to defeat a motion to dismiss. Instead, defendants should directly challenge the adequacy of the circumstances and inferences supporting the claim of actual knowledge, in addition to challenging allegations of substantial assistance on the basis that the services at issue were routine.
1. In re TelexFree Sec. Litig., No. 4:14-md-02566, 2022 U.S. Dist. LEXIS 156964 (D. Mass. Aug. 31, 2022).
2. "A claim for tortious aiding and abetting under Massachusetts law has three elements: (1) a tortfeasor committed an underlying tort; (2) the defendant knew that the tortfeasor was committing the underlying tort; and (3) the defendant actively participated in or substantially assisted the tortfeasor in committing the underlying tort." Id. at *22–23.
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