Interactive Brokers opposes allegations that it aided Ponzi scheme
Several months after Interactive Brokers was taken to Court by a client over allegedly helping a Ponzi scheme perpetrated by Haena Park, the electronic trading major has responded to the complaint.
The document, filed by Interactive Brokers in the California Northern District Court, seeks to dismiss the allegations brought by the plaintiff.
Benjamin Chang has filed a complaint at the California Northern District Court, suing Interactive Brokers LLC for actual damages suffered by him and the (potential) class, and for other recovery for harm caused by IB aiding and abetting fraud and aiding and abetting breach of fiduciary duties.
The plaintiff alleges that he and the class are victims of a Ponzi scheme perpetrated with the Interactive Brokers’knowing assistance. The scheme was devised by Haena Park, an IB customer who solicited funds from Plaintiff and the members of the class through fraud and deceit and then misused those funds for her own gains and to make phony dividend payments to other investors caught up in the scheme.
IB allegedly recognized Park’s account was used to conduct a fraud, identifying her suspicious activity in reports reviewed by compliance analysts more than a dozen times during the life of the scheme. Rather than scrutinize the activity, freeze the account, and report Park to the authorities, IB disregarded its own compliance department’s red flags and written internal compliance policies to further aid Park, a lucrative IB customer, to continue the scheme through its brokerage services.
Through her IB account, Park lost over $14 million of her investors’ contributions before the scheme was discovered by regulators and Park was arrested. She was sentenced to 3 years in prison in 2018. In 2020, IB’s participation in the scheme came to light when the SEC, FINRA, and CFTC all simultaneously announced a joint action against IB for its role in the fraud and for other regulatory compliance violations.
According to Interactive Brokers, Chang’s putative class action is “a belated and opportunistic attempt to recast the routine acts of a broker-dealer as conduct that aided and abetted a fraudulent Ponzi scheme”.
Interactive Brokers notes that more than four years after the CFTC, the SEC, and the U.S. Attorney’s Office for the Southern District of New York exposed the fraudulent conduct of Haena Park, Benjamin Chang alleges thatInteractive Brokers LLC knowingly aided and abetted her efforts simply by processing trade orders she made through her IBKR account.
According to the broker, the plaintiff now seeks to foist the financial consequences of Park’s fraud upon IBKR, which merely provided electronic trade execution and clearing services to Park’s hedge funds. While IBKR is sympathetic to the losses Park caused to Plaintiff here, IBKR is not factually or legally responsible for such losses.
Park was an IBKR customer and operated several of her hedge funds through the IBKR platform. Interactive Brokers is a leading provider of electronic trade execution services. It does not recommend investments or offer financial advice to customers. Rather, IBKR merely submits its clients’ orders to exchanges and market centers for potential execution and processes their trades at clearinghouses for settlement.
The broker explains:
”IBKR does, of course, have certain regulatory obligations as a broker-dealer and a Futures Commission Merchant (FCM), and Plaintiff’s allegations hinge almost entirely on recent regulatory findings relating to alleged compliance failures. While IBKR takes these findings seriously, they come nowhere close to showing knowing and substantial assistance in Park’s scheme. To the contrary, the CFTC specifically found that IBKR had no such knowledge of Park’s scheme”.
According to IBKR, the plaintiff falls well short of meeting his pleading burden, in particular Rule 9(b)’s heightened pleading burden for fraud.
Plaintiff asserts that IBKR aided and abetted fraud (“Count I”) and aided and abetted a breach of fiduciary duty (“Count II”), both of which require “actual knowledge” of the specific object of the underlying wrong, along with “substantial assistance” to further the underlying fraud or breach of fiduciary duty. The broker says that the plaintiff does not come remotely close to meeting the stringent threshold for pleading “actual knowledge.”
He fails to plead that IBKR knew that Park was engaged in fraud, let alone that IBKR had “actual knowledge” of the specific object of her fraudulent Ponzi scheme. Similarly, according to the broker, the plaintiff fails to establish that IBKR played anything other than a routine broker-dealer function and therefore fails to plead “substantial assistance” with the requisite particularity.
The broker calls Plaintiff’s final claim under the California Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200 (“Count III”) “ a blatant and impermissible attempt to repackage his unsuccessful aiding-and-abetting claims”.
Finally, according to the broker, all of Plaintiff’s claims are barred by the statute of limitations. Park’s fraudulent conduct became public knowledge no later than 2016, when she was indicted in the Southern District of New York and was the target of parallel enforcement proceedings by the SEC and CFTC.
IBKR’s role as her broker-dealer and FCM was documented in each of these proceedings. Park was ultimately convicted in 2017. Plaintiff waited more than four years after her conviction – and five years after her indictment – to file the instant suit against IBKR without justification. The relevant statute of limitations for the aiding-and-abetting claims is three years because they sound in fraud; the UCL claim has a four-year period. Plaintiff was on inquiry of his claims no later than 2016 when Park’s conduct was revealed in the federal prosecution and enforcement actions against her and his claims are now barred.
For these reasons, IBKR insists that the Court should dismiss with prejudice Plaintiff’s claims.