- Key insight: The ruling lets both of the state's fraud theories proceed, including that Early Warning created "an atmosphere conducive to fraud" — a theory that requires no link between the network and the criminals who exploited it.
- What's at stake: A loss for Early Warning could force a bank-owned network to reimburse customers for scams they authorized, exposure that reaches its seven owner banks and the more than 2,200 banks and credit unions on Zelle.
- Supporting data: New York alleges scammers stole more than $1 billion from Zelle users between 2017 and 2023; the company logged 150,000 induced-fraud reports in 2020 alone, with $80 million in losses.
Overview bullets generated by AI with editorial review.
A New York judge refused to throw out the state's fraud lawsuit against the company that runs Zelle, keeping alive the attorney general's push to hold the bank-owned payment network responsible for scams that she says have cost its users more than $1 billion.
The ruling clears the way for Attorney General Letitia James' case against Early Warning Services, the Zelle operator owned by seven of the nation's biggest banks, to move into discovery, when each side digs into the other's internal records.
Justice Phaedra Perry-Bond of the New York Supreme Court denied Early Warning's motion to dismiss on Monday, a procedural decision, not a verdict.
Rulings on motions to dismiss require the judge or justice to assume that the allegations are true and decide only whether they add up to a valid legal claim. That assumption and the decision have no bearing on whether Early Warning actually did what the state says.
James wants to use state law to make a bank-owned network repay customers for scams they were tricked into approving, which cause the victims losses that federal rules force them to eat.
That is the exact liability line the banking industry has fought to hold.
A loss for Early Warning would reach past its seven owners (Bank of America, Capital One, JPMorganChase, PNC, Truist, U.S. Bank and Wells Fargo) to the hundreds of other banks and credit unions that connect to Zelle.
What the judge let stand
James presented two legal theories in her complaint against Early Warning; Perry-Bond let both move forward.
Both theories stem from a
It is one of the office's sharpest tools. Unlike an ordinary fraud claim, the law does not require proving that victims relied on a false statement, and it lets the state seek restitution and court-ordered fixes, not just money damages.
James used the same law in her civil-fraud case against President Trump.
The first theory the state put forward in its
The company argued the ads were puffery, which is the legal term for vague boosterism that the law doesn't treat as factual promise. The judge disagreed.
Courts weigh an ad by the overall impression it leaves, Perry-Bond wrote, and Zelle's disclaimers were not prominent or clear enough to undo the message.
The second theory is that Early Warning created "an atmosphere conducive to fraud," per the complaint.
Citing a previous ruling by a higher state court, Perry-Bond said that claim does not require any relationship between the network and the criminals who use it. Profiting from transactions a company knows are fraudulent, despite that knowledge, is enough.
Early Warning acknowledged at oral argument that it "continued to collect and retain transaction fees from those fraudulent transactions" even as it knew fraud was draining hundreds of millions of dollars from consumers, the judge wrote.
That, she found, raises a question of fact over whether the company ratified the fraud.
She also rejected Early Warning's argument that the losses were too small to matter, noting that the "almost $1 billion" in alleged losses was hardly trivial.
Both sides dig in
"This was not a ruling on the merits of the New York Attorney General's claims and changes nothing," a Zelle spokesperson told American Banker, adding that the company "intends to appeal."
The attorney general is "targeting our company for political gain by recycling claims that courts across the country have rejected as meritless," the spokesperson said, and Early Warning is "vigorously defending this baseless lawsuit."
The company has said
That figure is hard to put in context. Payment networks are not required to report fraud and scam rates in a standardized way, so there is no independent measure of
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The attorney general's office is still pursuing the same remedies it sought at the outset of the lawsuit, a spokesperson for the office said. Those included restitution for New Yorkers who lost money and a court order forcing Early Warning to put anti-fraud measures in place.
"A judge denied Zelle's attempt to dismiss our lawsuit after they failed to protect users from rampant fraud," James said in a Monday
What it means for the network
At the center of People v. Early Warning Services is a question over which banks have spent years fighting: Who pays when a customer gets scammed?
Under the federal Electronic Fund Transfer Act and its Regulation E, banks generally have to repay customers for
By contrast, when a customer gets tricked into sending money, that is an authorized transaction because the customer gave the go-ahead, even if not with full understanding of who was on the receiving end.
Banks are not generally liable to reimburse these losses, leaving scam victims holding the bag. James is looking to close that liability gap through state law, and the exposure reaches well past Early Warning.
The complaint describes a network of more than 2,200 banks and says the company logged 150,000 reports of induced fraud, or scams, in 2020, with $80 million in losses; 375,000 reports the next year, with an internal estimate of $213.5 million; and roughly $500 million in consumer losses in 2022, about $300 million of it from scams.
Holding the network liable would not stop the scams, would disrupt a nationwide payment system, and would create a moral hazard that could "strain community banks and credit unions," the American Bankers Association argued in a
The judge called those public-policy arguments premature because the court has not found anyone liable for anything yet.
The industry's warning about moral hazard has an answer in other countries' experience, according to Carla Sanchez-Adams, a senior attorney at the National Consumer Law Center, a consumer-advocacy nonprofit.
She pointed to the United Kingdom, which since October 2024 has
Plus, a small bank or credit union that finds Zelle too much of a liability risk "can choose not to offer the service or put their own restrictions on use in place," such as transaction limits, Sanchez-Adams said.
The bigger fight
James
The bureau alleged $870 million in Zelle losses, but dropped that case in March 2025 after the Trump administration took over. It may not refile the case.
Since then, state attorneys general have moved to
Following the Monday ruling, Early Warning now has 20 days (from the time of the ruling) to answer, and both sides are due to propose a plan for discovery by Sept. 8.
The allegations the judge had to assume true will finally face a test against the company's own records, unless the appeal Early Warning has promised reaches a higher court first or the two sides settle.
How the case ends will shape what consumers get out of it. A fully litigated case would expose what Early Warning knew about the fraud and how it responded, giving other state attorneys general a template to follow where their own laws allow, according to Sanchez-Adams.
A settlement would keep those records private, she said, but still return money to New Yorkers who lost it to scams.
