Interactive Brokers secures win in Ponzi scam lawsuit
Electronic trading major Interactive Brokers has secured a win in a lawsuit brought by a victim of a Ponzi scheme operated by Haena Park. On April 25, 2022, Judge Nathanael Cousins of the California Northern District Court signed an order dismissing the case against the broker.
This case, concerning allegations that Interactive Brokers LLC (IBKR) aided and abetted Haena Park in a Ponzi fraud scheme, was before the Court on a second motion to dismiss. The Court had previously dismissed the complaint finding that Plaintiff Benjamin Chang failed to allege that IBKR had actual knowledge of Park’s fraud and breach of fiduciary duties.
The Court has evaluated whether Chang’s first amended complaint (FAC) cured these deficiencies. Having considered the briefing and the parties’ arguments, the Court granted IBKR’s second motion to dismiss without leave to amend.
In this case, Benjamin Chang sues Interactive Brokers on behalf of himself, and other victims of a Ponzi scheme devised by Haena Park and conducted on Interactive Brokers LLC’s trading platform. Chang alleges that IBKR aided and abetted Park in facilitating her fraudulent scheme and breaching her fiduciary duties to her investors, resulting in the loss of over $14 million of investor contributions.
The first amended complaint adds the following relevant allegations: IBKR conducted automated and manual compliance reviews to assign investors, including Park, risk profiles. Because of Park’s “excessive losses and deposits,” IBKR elevated her risk profile rating and increased its focus on her account.
Through its reviews IBKR knew: Park was experienced in the financial industry and likely to have connections to third-party investors; Park was an individual “at-home” trader who was not permitted to pool third-party funds through her IBKR account; Park consistently deposited and invested more than her net worth through her IBKR account; Park’s losses consistently exceeded what her means would normally be able to sustain; and Park continued to make frequent cash deposits and risky trades despite the losses.
The first amended complaint further alleges that “IBKR may not have had specific knowledge of certain details of Park’s scheme, such as the exact number of her investors, the identities of her investors, or the specific misrepresentations she made to her investors regarding their investments.” But IBKR did “know” or “conclude” that Park’s account was “necessarily” using third-party investor funds. Despite this awareness, IBKR compliance officers “overrode” the automated compliance review to allow Park to continue trading.
Finally, the first amended complaint adds that IBKR violated California’s Unfair Competition Law by violating federal regulations requiring futures commodity merchants and Commodity Futures Trade Commission registrants to diligently supervise commodity interest accounts and to report certain activity involving funds obtained by illegal activity.
IBKR’s motion to dismiss reiterated the arguments it raised in its first motion to dismiss–the FAC fails to state a claim for aiding and abetting fraud and breach of fiduciary duty because it does not sufficiently allege IBKR’s “actual knowledge” of Park’s scheme or IBKR’s “substantial assistance” in the scheme; the UCL claim is insufficient because it relies on the insufficient aiding and abetting allegations; and all claims are time barred.
After reviewing the deficiencies identified in the Court’s previous order and evaluating the new allegations in the FAC, the Court found that the allegations are still insufficient to state a claim. Thus, the Court granted IBKR’s motion to dismiss.
Because Chang already had the opportunity to correct the same deficiency and was unable to plead additional facts to support his claim, the Court concluded that granting leave to amend would be futile.