Jung Min Lee v. Foris Dax, Inc., et al.

Background

Lee alleged that scammers on Instagram persuaded her husband, Patz, to open a Crypto.com account, withdraw almost a million dollars from a First Republic Bank account, and transfer the funds through Crypto.com to the scammers’ wallet in 13 transactions. Lee’s second amended complaint asserted several claims. In an earlier order, the court dismissed all claims except a claim under California’s Unfair Competition Law, or UCL, based on alleged violations of the Bank Secrecy Act, or BSA.

Lee’s remaining UCL claim used the BSA as the alleged unlawful conduct supporting the UCL’s unlawful-practices prong. She alleged that Crypto.com, as a registered money-services business, failed to maintain an adequate anti-money-laundering program. Crypto.com moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c), arguing that Lee could not establish the required causal connection between the alleged BSA violations and her losses.

Judgment on the Pleadings

The court held that Lee plausibly alleged the first element of her UCL claim: alleged unlawful conduct based on Crypto.com’s supposed violations of the BSA’s anti-money-laundering requirements. The court rejected Crypto.com’s arguments that the BSA could not serve as a predicate for the UCL claim, that the BSA created a duty of care to customers, and that the alleged harm was irrelevant because it involved theft rather than money laundering.

The court ruled, however, that Lee did not plausibly allege the second element: causation. The UCL requires a causal connection between the harm and the unlawful business activity, including but-for causation. The court found that the BSA and its regulations did not require Crypto.com to prevent the alleged type of harm. In particular, the court stated that the anti-money-laundering regulations required a reasonably designed program, while the Travel Rule required transmission of specified information and did not require Crypto.com to halt the suspect transactions. Because Crypto.com could have complied with the BSA and still allowed the money to reach the scammers, the court concluded that the alleged BSA violations could not have caused Lee’s losses.

The court also concluded that the alleged BSA violations were not a substantial factor in causing the losses. It relied in part on decisions involving cryptocurrency platforms and money laundering, as well as a Ninth Circuit decision concerning indirect support for an earlier theft. The court stated that the scammers’ and Patz’s conduct diminished Crypto.com’s causal role and that Lee had not shown that Crypto.com’s alleged anti-money-laundering deficiencies had a stronger causal connection to the loss.

The court did not reach Crypto.com’s additional argument that the scammers’ conduct was a superseding cause because its other causation arguments were dispositive. The court also held that the law-of-the-case doctrine did not prevent consideration of the causation issue because its earlier decisions had not decided the specific causation required for UCL standing.

Discovery Disputes

Lee sought additional records, including transaction histories, reports, investigation files, communications, and information concerning wallet addresses and transaction hashes. She argued that the materials could show that Crypto.com detected the scam enterprise before Patz’s first transfer and could establish liability and causation.

The court denied Lee’s discovery requests. It found that the cited documents did not establish that Crypto.com had identified, flagged, or recognized the specific transactions as scam-related. The court further held that even accepting Lee’s descriptions of the documents, the materials would not affect the causation analysis because the BSA did not impose liability for failing to prevent the alleged type of harm. The court also stated that the parties had not adequately met and conferred, and that the requests were disproportionate and overly burdensome.

Sealing and Other Motions

The court granted Crypto.com’s requests to seal specified portions of Lee’s opposition and related filings. The sealed information included commercially sensitive internal processes and procedures concerning fraud detection and prevention, internal alert classifications, investigative systems, and third-party customer transaction information. The court found compelling reasons or good cause, depending on the filing, to keep the specified information sealed.

The court denied Crypto.com’s motion to stay discovery as moot. The court also stated that the order rendered moot later stipulations concerning the pretrial schedule and a request involving confidentiality designations.

Disposition

Judge Orrick granted Crypto.com’s motion for judgment on the pleadings. The court stated that further amendment was not warranted and directed that judgment be entered. The order also denied Lee’s discovery requests, denied the motion to stay discovery as moot, and granted the specified sealing requests.