Whitaker v. Wedbush Securities, Inc.
Posted on Categories Court Decisions, Securities Customers

By James L. Komie

A futures commission merchant acts as a “bank” under Article 4A of the UCC where it processes wire transfer instructions for an institutional customer and is potentially subject to a claim for refund under Article 4A where it transferred money based on a hacker’s email instructions.

Whitaker vs. Wedbush Securities, Inc., No. 124792, 2020 IL 124792 (Ill., 3/19/20).

Plaintiff Whitaker and his wholly-owned firm, plaintiff Pathology Institute of Middle Georgia, maintained commodity futures trading accounts with defendant Wedbush Securities. A hacker accessed plaintiff Whitaker’s email account and sent emails to Wedbush directing wire transfers to a bogus account in Poland. Wedbush processed the wire transfers and sent $374,000 from plaintiffs’ Wedbush accounts to the bogus account.

After Wedbush refused to refund the lost money, plaintiffs filed suit in Illinois state court alleging claims under Article 4A of the UCC. The trial court entered judgment for Wedbush after a bench trial, finding that plaintiffs had not met their burden of proving Wedbush constituted a “bank” under Article 4A, a prerequisite to a refund claim under Article 4A. The appellate court affirmed the trial court’s ruling.

The Supreme Court of Illinois reverses. Article 4A of the UCC establishes a legal framework for wire transfers, balancing the “rights and obligations between a bank and its institutional customers when completing funds transfers.” The question presented is whether a futures commission merchant like Wedbush acts as a “bank” subject to Article 4A with respect to wire transfers from its customers’ accounts. Article 4A defines “bank” as “a person engaged in the business of banking.” While this circular definition is unhelpful, the comments by the drafters of Article 4A note that “many financial institutions now perform functions previously restricted to commercial banks, including acting on behalf of customers in funds transfers.”

Based on this comment and to effectuate the purposes of the UCC, other courts have held that a broker/dealer may constitute a “bank” where it acts on behalf of a customer in a wire transfer. Potential liability, however, is limited to “financial institutions” that offer wire transfer services to their customers and does not extend to other entities, such as law firms or title companies. As Wedbush is a financial institution that offers wire transfer services to its customers, the trial court should have held Wedbush acted as a “bank” in processing the wire transfers here and is thus potentially subject to liability under Article 4A. The case is remanded for further proceedings.

(J. Komie: Although found to be a “bank” for Article 4A purposes, it is far from clear Wedbush will be held liable for processing the bogus wire transfers. An institutional customer that allows itself to be hacked is in a difficult position to prevail on a refund claim under Article 4A.)

(SOLA Ref. No. 2020-16-09)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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