The opinions expressed here are those of the author, a columnist for Reuters.

By Jenna Greene

Jan 27 (Reuters) - As far as scams go, Eddy Alexandre’s $260 million cryptocurrency scheme fell squarely in the too-good-to-be-true camp.

The CEO of trading platform EminiFX, Alexandre allegedly promised tens of thousands of investors, many of them fellow members of the U.S. Haitian community, huge returns with no risk.

What’s more novel is a move by the court-appointed receiver charged with recovering the victims’ funds. Earlier this month, receiver David Castleman, a partner at law firm Otterbourg, sued electronic trading firm Interactive Brokers, or IBKR, claiming it knew or should have known that Alexandre, now serving a nine-year prison sentence, was running a Ponzi scheme, and that it negligently allowed him to “squander” his investors’ money.

Based on court holdings in other cases, I suspect it’s likely to be a steep — though not unprecedented — hill to climb. Still, the effort raises intriguing questions to me about how third parties might be held liable for enabling investment scams, which have proliferated.

According to the U.S. Federal Trade Commission, consumers reported losing an all-time high of $4.6 billion to investment scams in 2023, more than any other category of fraud.

IBKR in a statement denied wrongdoing.

“This is a baseless and unwarranted case that should be dismissed,” the Greenwich, Connecticut-based company said, adding that it “had nothing to do with the fraud Mr. Alexandre conducted.”

The federal government in 2022 brought criminal and civil charges against Alexandre, who pleaded guilty to one count of commodities fraud and is currently incarcerated at a low-security prison in Pennsylvania.

Prosecutors said he promised investors returns between 1,164% and 14,037% per year, claiming that he used “secret” artificial intelligence trading technology to invest in cryptocurrency and foreign currency exchanges.

The scheme itself was relatively short-lived, running from September 2021 until U.S. District Judge Valerie Caproni in Manhattan froze EminiFX's assets in May 2022 and appointed Castleman as receiver.

He's already recovered $152 million in assets, announcing last week that he’ll be distributing $100 million to about 35,000 victims, covering 45% to 55% of their losses. (The balance is being held in reserve, mainly for potential tax liabilities.)

But he’s not done.

Suing IBKR offers the chance for further monetary recovery for victims of Alexandre’s fraud, Castleman told me.

According to the complaint, which was filed in New York state court, removed by IBKR to federal court in Manhattan and may yet be remanded back, Alexandre had just over $3,000 in his personal IBKR brokerage account on Nov. 30, 2021.

Over the next two months, he transferred $9 million from his personal bank account to his account at IBKR.

The brokerage allowed the deposits, as well as Alexandre’s subsequent high-risk trading, even though the behavior was “radically divergent from Alexandre’s use of his personal account up to that time,” the complaint states.

At the same time, Alexandre also attempted to open an IBKR account for EminiFX, allegedly indicating that the deposits in his personal account were “to complete the funding” of the new corporate account.

IBKR rejected EminiFX's application as deficient, requesting additional information about the business, which Alexandre vaguely described as an “investment club” with a “userbase.”

Asserting gross negligence, negligence and aiding and abetting breach of fiduciary duty, the complaint claims IBKR knew or should have known that Alexandre was trading EminiFX customer funds that he’d deposited into his own account, losing more than $7 million in short order. The suit seeks a refund of the losses plus interest and legal fees.

Represented by Dechert, the brokerage in a motion to dismiss responded that Alexandre “hid his fraud,” and that IBKR did not know of or participate in the Ponzi scheme.

Alexandre lost the money based on “self-directed investment decisions” in his personal brokerage account, IBKR said, noting that it already handed over the $1.7 million he had left in the account to the receiver.

Moreover, defense counsel argue that the receiver lacks standing to sue IBKR on behalf of scam victims. “Brokerage firms, like banks, do not owe non-customers a duty to protect them from the intentional torts of their customers,” they wrote in seeking dismissal.

Here, the lone plaintiff in the case (acting through the receiver) is EminiFX, which did not have an IBKR account. As for the wronged investors, they’re neither parties to the case nor IBKR customers, and the Dechert lawyers argue Castleman overstepped his mandate in bringing the suit.

One key point of contention may be the applicability of in pari delicto (“In equal fault”). The doctrine is based on the notion that a party injured by its own wrongdoing should not be able to use the courts to go after other participants in the same scheme who bear equal or lesser fault.

What’s less clear is how this applies when there’s a receivership in place. Yes, Castleman is standing in the shoes of fraudster EminiFX, but he’s doing so on behalf of innocent people who were scammed. Does that mean the receivership is cleansed of EminiFX’s taint?

Maybe not.

For example, the 8th U.S. Circuit Court of Appeals in September threw out a $564 million jury verdict against a Bank of Montreal subsidiary over its role in multibillion dollar Ponzi scheme run by a now-convicted Minnesota businessman.

The court held that the trustee of the man's bankrupt company could not recover on behalf of its creditors because the company helped orchestrate the fraud.

Likewise, the 2nd Circuit in 2013 barred a trustee from asserting claims on behalf of the estate of Bernard Madoff’s failed brokerage firm against JP Morgan Chase.

However, Castleman points to a $95 million federal jury verdict in Florida against Deutsche Bank in 2023 finding the bank was negligent in disregarding warning signs of a Ponzi scheme.

"Every case has its own facts," Castleman said, adding that in pressing forward with the suit against IBKR, he’s seeking to reclaim “real money for real people.”

(Reporting by Jenna Greene)