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James says Zeller ignored basic anti-fraud safeguards

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BofA, Chase, Wells Fargo ( WFC ), other banks own Zelle parent

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Zelle calls James' claims meritless, touts safety

(Adds Zelle comment, details from complaint, paragraphs 7-9,

13-15)

By Jonathan Stempel

NEW YORK, Aug 13 (Reuters) - Zelle was sued on Wednesday

by New York Attorney General Letitia James, who said the

electronic payment platform's refusal to adopt critical safety

features enabled fraudsters to steal more than $1 billion from

consumers.

The lawsuit in a New York state court in Manhattan followed

the U.S. Consumer Financial Protection Bureau's decision in

March to drop a similar case.

That agency has ended most enforcement activity following

U.S. President Donald Trump's return to the White House.

Zelle was launched in 2017, and competes with apps such as

PayPal's ( PYPL ) Venmo and Block's Cash App.

Its parent, Early Warning Services, is owned by seven large

U.S. banks: Bank of America ( BAC ), Capital One,

JPMorgan Chase ( JPM ), PNC, Truist, US Bank

and Wells Fargo ( WFC ).

James said Zelle's parent and the banks knew for years that

the platform was vulnerable to fraudsters but resisted basic

safeguards, with the banks sometimes ignoring customer

complaints while Zelle let fraudsters stay on the platform.

The result was "rampant" fraud that Zelle sometimes refused

to address even after it occurred, despite its assurances it was

a safe alternative to cash and checks and "backed by the banks,

so you know it's secure," the complaint said.

In a statement, Zelle said more than 99.95% of transactions

on its platform are completed without reported fraud, leading

the industry.

"This lawsuit is a political stunt to generate press, not

progress," Zelle said. "The Attorney General should focus on the

hard facts, stopping criminal activity and adherence to the law,

not overreach and meritless claims."

Early Warning Services is based in Scottsdale, Arizona. The

seven banks were not named as defendants.

PUPPY, UTILITY BILL SCAMS

James said typical scams involved hacking into users'

accounts and making unauthorized transfers, convincing users to

send money for nonexistent goods and services, and impersonating

banks, government offices and utilities.

According to the complaint, one victim was told his

electricity would be shut off unless he paid Con Edison $1,477

via Zelle, to an account named "Coned Billing."

Another victim said Chase and Zelle wouldn't help him after

he sent $2,600 in two installments via Zelle to buy a puppy, and

realized he had been scammed when the purported seller demanded

more money.

James said it wasn't until 2023, after the CFPB and several

members of Congress began probes, that Zelle adopted "basic"

safeguards it had proposed four years earlier.

While reported fraud losses plummeted, the safeguards were

"too little too late" for consumers who had lost money, and

despite those safeguards Zelle still facilitates "substantial

fraudulent activity," the complaint said.

"No one should be left to fend for themselves after falling

victim to a scam," James said in a statement.

The lawsuit seeks to require Zelle to beef up anti-fraud

protections, and pay restitution and damages to defrauded New

Yorkers.

James sued Capital One in May for allegedly cheating savings

depositors out of millions of dollars in interest, and in June

settled claims against MoneyGram over remittance transfer

lapses. The CFPB abandoned similar cases earlier in the year.