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Reynaldo Reyes On Behalf of Himself and All Others v. Zion First National Bank

March 21, 2012

REYNALDO REYES ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED
v.
ZION FIRST NATIONAL BANK, ET AL.



The opinion of the court was delivered by: Juan R. Sanchez, J.

MEMORANDUM

Defendants Zions First National Bank, NetDeposit, LLC, and MP Technologies (collectively "the Zions Defendants"); National Penn Bank (National Penn), Wells Fargo Bank, N.A. (Wells Fargo), and Wachovia Bank, N.A. (Wachovia) (collectively "the Bank Defendants"); and Teledraft, Inc., ask this Court to dismiss Plaintiff Reynaldo Reyes's Amended Complaint in its entirety.*fn1 Reyes brings claims on behalf of himself and others similarly situated pursuant to the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1964(c). Reyes alleges the Zions Defendants constituted an enterprise engaged in a pattern of racketeering, in violation of 18 U.S.C. § 1962(c), and conspired to facilitate a racketeering enterprise, in violation of § 1962(d), by deducting funds from the bank accounts of Reyes and the other putative class members without their authorization, on behalf of certain fraudulent telemarketers. Reyes alleges the Bank Defendants conspired with the telemarketers and the Zions Defendants to facilitate this scheme by laundering the proceeds of the fraud, in violation of § 1962(d), and that Teledraft violated § 1962(d) by joining the conspiracy when it replaced MP Technologies as the payment processor for certain fraudulent telemarketers.

All Defendants move to dismiss the Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), based on Reyes's failure to plead sufficient facts to support his claims for relief. Teledraft also moves to dismiss for lack of personal jurisdiction pursuant to Rule 12(b)(2), and improper venue pursuant to Rule 12(b)(3). Because Reyes has failed to state a claim against the Bank Defendants, their motions to dismiss will be granted. The Zions Defendants' and Teledraft's motions to dismiss will be denied.

FACTS*fn2

In November 2007, a telemarketer from National Healthcare Solutions (NHS)*fn3 called Reyes and falsely told him he was eligible for a government grant and, if he provided his bank account information, the government would deposit grant funds directly into Reyes's account. The telemarketer did not tell Reyes that he would incur a charge in connection with this grant, or that any money would be debited from his account. Reyes provided information for his account at Commerce Bank, and NHS, thereafter, initiated two deductions, for $29.99 and $299.99, respectively. Neither of these deductions was authorized by Reyes, and Reyes did not receive a government grant. The deductions were processed by a payment processor, Defendant MP Technologies d/b/a Modern Payments (MP)-that is, MP provided Reyes's account information to Defendant Zions First National Bank (Zions Bank), which initiated a wire transfer of the funds from Reyes's account into an account at Zions Bank. Because Reyes had insufficient funds in his account to cover the withdrawals, he incurred overdraft fees and suffered a loss of nearly $400. After the two withdrawals from his account were completed, Reyes called NHS to complain and an NHS representative played him an audio recording which the representative claimed evinced Reyes's oral consent for NHS to deduct funds from his bank account. Reyes asserts this recording was either fraudulently altered or taken out of context.

Reyes asserts fraudulent telemarketing of this type, in which unscrupulous persons and companies perpetrate schemes to obtain private information from unsuspecting individuals, is a widespread problem. Typically, fraudulent telemarketing representatives call individuals and offer them nonexistent government grants, worthless discount health services programs, or other similarly valueless products. Once telemarketers receive consumer bank account information, they need a mechanism by which to withdraw funds from the consumer accounts. Reyes alleges fraudulent telemarketers use two methods to deduct funds from an individual's bank account without authorization. One method is an electronic transfer processed through an Automated Clearing House (ACH) debit, referred to as an ACH TEL debit when processed over the phone. To complete an ACH TEL transaction, the telemarketer provides a third-party payment processor with the consumer's bank account information. The payment processor then directs its bank to initiate a wire transfer through the ACH system from the consumer's account into the processor's account. After both the processor and its bank take a fee, the remaining funds are transferred into the telemarketer's bank account. The second method is a remotely created check (RCC), which is a paper check created by a payment processor drawn on the consumer's bank account, which includes the printed statement "authorized by drawer" or other similar language in lieu of a signature. The RCC is made out to the telemarketer and is either deposited directly into the telemarketer's account, or deposited first into the processor's account before being transferred to the telemarketer's account. Each RCC generates a fee for the payment processor.

Reyes posits that due to the risk of fraud inherent in these kinds of telemarketing transactions, such business is heavily regulated. For instance, pursuant to rules governing electronic payments promulgated by the National Automated Clearing House Association (NACHA), ACH TEL transactions are only permitted when there is a pre-existing relationship between the telemarketer and the consumer, or when the consumer initiated the phone call. In other words, banks, including Zions Bank, are prohibited from conducting ACH TEL debits originated by outbound telemarketing-the practice of telemarketers initiating sales calls to strangers. ACH TEL debits are also prohibited for recurring payments, even if not originated by outbound telemarketing.

In addition, when an ACH debit is "returned"-the process by which the transaction is reversed and the funds are returned to the account from which they were debited-the bank "undoing" the transaction must indicate the reason for the return, including if the transaction was unauthorized or there were insufficient funds. NACHA publishes industry return rates and will scrutinize and potentially fine telemarketers and banks with return rates above the national average, as high return rates are "strong indications of fraud." Am. Compl. ¶ 41.

Reyes further asserts the NACHA operating rules and other banking laws, such as the Bank Secrecy Act and the Patriot Act, as well as handbooks and manuals of the Office of Comptroller of Currency and other industry and government agencies, require banks to perform customer due diligence designed to prevent money laundering and other illegal use of the banking system. Among other requirements, banks must seek to understand their customers' relationships with the bank, and monitor for suspicious or potentially illegal transactions. Enhanced due diligence requirements apply to "high-risk" customers like telemarketers. In addition, banks are advised to screen third party payment processors-such as Defendants MP, NetDeposit, LLC (ND), and Teledraft-for which the bank performs services because payment processors can be vulnerable to processing illicit transactions. In particular, banks should know what entities are originating a payment processor's ACH transactions, and whether those entities, such as telemarketers, are legitimate businesses.

It is against this backdrop that Reyes alleges RICO violations by Defendants, various banks and payment processors. Reyes does not bring claims against NHS or any other telemarketer,*fn4 but instead alleges the Zions Defendants, the Bank Defendants, and Teledraft have violated RICO by processing and helping to launder funds obtained through fraudulent telemarketing practices. Reyes seeks to represent a class of individuals "as to whom ACH debit entries or RCC drafts on their accounts were prepared by [D]efendants ND, MP, or Teledraft or were credited to accounts at [D]efendants Zions Bank, National Penn, Wells Fargo or Wachovia during the four-year period immediately preceding the filing of this action and finally charged to the class members' bank accounts by a telemarketer." Am. Compl. ¶ 57.

Count I of Reyes's Amended Complaint alleges the Zions Defendants*fn5 comprised and conducted an enterprise engaged in a pattern of racketeering activity, in violation of 18 U.S.C. § 1962(c). Reyes asserts MP/ND received unauthorized access devices-fraudulently obtained consumer bank account information-from telemarketers and processed such access devices by arranging for Zions Bank to initiate ACH transactions which debited his and the class members' accounts, all constituting a pattern of racketeering activity. After the Zions Defendants took their respective fees, MP/ND would then direct Zions Bank to transfer the funds by interstate or international wire to bank accounts held by the fraudulent telemarketers.

Reyes further asserts the Zions Defendants were well aware of the fraudulent nature of these transactions. He notes the ACH return rates for their telemarketing clients, including the rates for debits returned as unauthorized, were dramatically higher than the national average. NHS, for instance, had unauthorized return rates in excess of NACHA rules during every month MP/ND served as its processor. Moreover, the telemarketers responsible for these return rates were known to have operated fraudulent schemes in the past, and several were the subject of state and federal enforcement actions for fraudulent telemarketing. The Zions Defendants also had received complaints about the practices of at least one telemarketing client, and thus knew they were processing ACH TEL transactions for outbound telemarketing in violation of NACHA operating rules.

Count II alleges the Zions Defendants conspired to facilitate other, separate RICO enterprises consisting of groups of fraudulent telemarketers. Reyes asserts the Zions Defendants, through their conduct described above, knowingly assisted several different "Telemarketer Enterprises," including the enterprise alleged to have defrauded him, "the NHS/PHS Enterprise,"*fn6 which were engaged in patterns of racketeering activity, including wire fraud, in violation of 18 U.S.C. § 1962(d).

Counts III and IV assert claims against the Bank Defendants for conspiring to facilitate RICO enterprises, in violation of 18 U.S.C. ยง 1962(d). Specifically, Reyes alleges after Zions Bank initiates wire transfers from consumers' accounts into its own accounts, the funds are transferred into the fraudulent telemarketers' accounts with the Bank Defendants. Frequently, the telemarketers then direct the Bank Defendants to transfer such funds to off-shore accounts. Reyes asserts the Bank Defendants, in conducting these transactions, knowingly facilitated both the "Telemarketing Payment Enterprise"-the Zions Defendants-and the NHS/PHS Enterprise, by attempting to launder the proceeds of the telemarketing fraud. In alleging the Bank Defendants knew of, or were willfully blind to, the alleged conspiracy, Reyes asserts banking regulations required the Bank Defendants to scrutinize the accounts of their telemarketer customers, giving the Bank Defendants reason to know several of the individuals associated with the telemarketers had been involved with fraudulent telemarketing schemes and had been subject to government enforcement proceedings. Reyes also alleges the telemarketers' practice of directing the Bank Defendants to transfer funds into bank accounts in Canada, St. Lucia, and India was an additional "red flag" of misconduct, as banks are aware ...


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