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A federal court just refused to let a bank walk away from a two hundred thirty million dollar Ponzi scheme. Not the promoter — promoters are usually broke by the time the music stops — the bank that held the accounts. More than eighteen hundred investors put money into a real estate operation called iCap before it collapsed, and when the dust settled, the question became: who else knew? According to the complaint, the answer was sitting in the bank’s own compliance files. If you or a client has lost money to investment fraud in New Mexico, this decision is a map — and reading it right can change a recovery by six figures.
Start with the rule most victims learn the hard way: you generally cannot sue a bank just because a fraudster banked there. To hold a bank liable for aiding and abetting a fraud, you need three things: an underlying fraud, the bank’s actual knowledge of it, and substantial assistance. Actual knowledge is the wall. Red flags the bank should have investigated — what lawyers call constructive knowledge — are not enough in most courts. And routine banking — opening accounts, wiring money, clearing checks — rarely counts as substantial assistance. That is why most of these lawsuits fail. A New York court recently threw out a case built on nothing more than an unusually active account and the bank’s general anti money laundering duties. The winning cases look different, and here is the distinction that matters: they are built on what the bank’s own systems generated.
iCap was a Pacific Northwest real estate enterprise that raised roughly two hundred thirty million dollars before falling into bankruptcy, where the court found substantial evidence of a Ponzi scheme running for about five years. A trust holding claims assigned directly by individual investors then sued the bank that held the accounts. The bank moved to dismiss, arguing the complaint showed only routine banking. The court disagreed — because of the bank’s own paperwork. The bank had classified the accounts as high risk. It ran at least seventeen enhanced due diligence reviews. Its monitoring allegedly let it watch investor money flow in, roughly five hundred eighty-five million dollars flow out, funds commingle, and transfers land in an insider’s personal accounts. Keeping those accounts open and processing the transactions anyway — that, the court said, could be substantial assistance. Two cautions travel with this decision. It is a pleading stage ruling; nothing is proven yet. And the trust only had standing because investors assigned their claims directly — a receiver suing in the schemer’s own shoes has lost on exactly that ground.
Here is why the map matters. The estate — the receiver or bankruptcy trustee — usually pays pennies on the dollar, and it pays over years. The investor protection fund behind brokerage accounts does not cover real estate programs, private oil and gas deals, or crypto platforms — exactly what gets sold in Santa Fe, Hobbs, and Albuquerque. Often the fastest real dollars come from the tax code. A Ponzi loss from an investment made for profit is an ordinary theft loss deduction, not a capital loss trapped behind a three thousand dollar annual limit. An IRS safe harbor fixes the deduction at ninety-five percent of the loss if you forgo suing third parties, or seventy-five percent if you sue. For a Santa Fe retiree with a two hundred fifty thousand dollar qualified loss, that is a fifty thousand dollar swing — a number to weigh against what any lawsuit is realistically worth.
Three things to do this week if a deal has gone bad — or is starting to smell wrong. First, preserve everything: subscription documents, wire confirmations, account statements, every message with the promoter. Those records decide whether a claim against a bank is even possible. Second, if a trustee’s demand letter arrives asking you to return withdrawals, do not pay or respond before getting advice — good faith can protect your principal, but never fictitious profits. Third, before joining any lawsuit, run the safe harbor math, because the election can be worth more than the case. That’s what we do at North Star Law Firm. The initial consultation is free, and the full written analysis with citations is at nm-legal.net.
A federal court just refused to let a regional bank walk away from a $230 million Ponzi scheme. In iCap Trust v. Columbia Bank, No. 2:25-cv-01870 (W.D. Wash. 2026), investors’ assigned claims survived dismissal because the bank’s own compliance files allegedly showed it understood what was flowing through the accounts and kept processing anyway. For New Mexico investors — Santa Fe retirees pitched at church, Hobbs families sold oil-and-gas “working interests,” Albuquerque professionals lured onto crypto platforms — the ruling is a map. Recovery comes from several directions, and knowing where to look first can change the outcome by six figures.
What did the federal court decide in the iCap case against Columbia Bank?
iCap, a Pacific Northwest real estate enterprise, raised roughly $230 million from more than 1,800 investors before collapsing into bankruptcy, where the Bankruptcy Court for the Eastern District of Washington found substantial evidence of a Ponzi scheme running from 2018 to 2023. A liquidating trust holding investor-assigned claims then sued Columbia Bank (formerly Umpqua Bank), which held the accounts.
The bank moved to dismiss, arguing the complaint showed only routine banking; the court disagreed. Actual knowledge was plausibly alleged through the bank’s own know-your-customer work: high-risk classifications, at least seventeen enhanced due diligence reviews, and monitoring that allegedly let it see investor money coming in, roughly $585 million in withdrawals going out, commingling, and transfers landing in a principal’s personal accounts. Substantial assistance followed from keeping the accounts open and processing transactions anyway. It is a pleading-stage decision — nothing is proven — but it shows a compliance paper trail can become the victims’ best evidence.
What must a fraud victim prove to hold a bank liable for aiding and abetting?
Aiding-and-abetting liability generally follows Restatement (Second) of Torts § 876(b): an underlying fraud or breach of fiduciary duty, the defendant’s actual knowledge of it, and substantial assistance. Constructive knowledge — red flags the bank should have investigated — is not enough in most jurisdictions, and routine banking rarely counts as substantial assistance, which is why most of these suits fail; in O’Dell v. Berkshire Bank, No. 5:24-cv-00652 (N.D.N.Y. Oct. 31, 2024), claims built on an unusually active account and generic anti-money-laundering duties were dismissed with prejudice.
Two lessons follow. First, winning complaints tie knowledge to what the bank’s own systems generated — due diligence memos, risk classifications, monitoring reports. Second, claim ownership matters as much as the merits: in Isaiah v. JPMorgan Chase Bank, N.A., 960 F.3d 1296 (11th Cir. 2020), a receiver’s claims failed because the receiver stood in the shoes of the fraud’s own corporate instruments — a trap the iCap Trust avoided by taking direct assignments from individual investors.
Where does recovery actually come from when a Ponzi scheme collapses?
The first source is the estate: victims file claims with the receiver or bankruptcy trustee and share pro rata in what is recovered — typically over years, often at pennies on the dollar. The estate’s strongest tool is fraudulent transfer law: under the judicially developed Ponzi-scheme presumption, transfers in furtherance of the scheme are presumed made with actual intent to defraud creditors under 11 U.S.C. § 548(a)(1)(A) and parallel state law — in New Mexico, the Uniform Voidable Transactions Act, NMSA 1978, §§ 56-10-14 through 56-10-25, reachable through 11 U.S.C. § 544(b).
That presumption cuts both ways. Investors who cashed out early with a profit — “net winners” — face clawback suits for everything above principal, because courts net withdrawals against contributions, Donell v. Kowell, 533 F.3d 762 (9th Cir. 2008); good faith protects principal under § 548(c), but never fictitious profits. Anyone holding a trustee’s demand letter should review clawback defenses before responding. SIPC, finally, protects cash and securities up to $500,000 ($250,000 cash) only at member broker-dealers — real estate programs like iCap, private oil-and-gas deals, and crypto platforms sit outside it. Because the promoter is usually judgment-proof, the realistic deep pockets are third parties — banks, auditors, brokers, promoters; the iCap litigation named dozens. That is why the Columbia Bank theory matters to victims, and why preserving subscription documents, wire confirmations, and communications early can determine whether a viable claim exists.
How does the federal theft loss deduction work after the OBBBA?
While litigation grinds on, the tax code often delivers the fastest real dollars. Under 26 U.S.C. § 165(e), a theft loss is deductible in the year of discovery, to the extent there is no reasonable prospect of recovery, and Rev. Rul. 2009-9 confirmed a Ponzi loss is a theft loss from a transaction entered into for profit under § 165(c)(2) — an ordinary deduction, not a capital loss trapped behind the $3,000 annual limit.
That distinction became critical after the Tax Cuts and Jobs Act, whose § 165(h)(5) suspended personal casualty and theft losses outside federally declared disasters — a suspension the One Big Beautiful Bill Act of 2025 made permanent while extending it to certain state-declared disasters. Profit-motivated theft losses were never suspended, and the IRS reinforced the line in Chief Counsel Memorandum 202511015 (Mar. 2025): investment-style scam victims — including crypto “pig butchering” targets — can show profit motive; purely personal scams generally cannot. The firm’s pig butchering theft loss analysis walks through that line.
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What would the safe harbor look like for a Santa Fe retiree who lost $250,000?
Rev. Proc. 2009-20 (as modified by Rev. Proc. 2011-58) gives qualified investors a safe harbor that avoids IRS fights over discovery year and recovery prospects. It applies once the scheme’s lead figure is criminally charged (or a civil complaint is paired with an admission or an appointed receiver or trustee), and fixes the deduction at 95 percent of the qualified loss for an investor forgoing third-party recovery claims, or 75 percent for one pursuing them, reduced by insurance or SIPC recoveries.
Take a Santa Fe retiree who invested $220,000 cash, reported and reinvested $30,000 of Form 1099 “interest” that never existed, and withdrew nothing. Her qualified investment is $250,000 — deposits plus previously taxed phantom income, minus withdrawals. The 95 percent option yields a $237,500 ordinary deduction in the year charges are filed; joining the bank litigation drops it to $187,500, a $50,000 swing to weigh against the lawsuit’s realistic value. New Mexico’s income tax builds on federal taxable income, so the deduction cuts state tax too. If it exceeds her income, § 172(d)(4)(C) treats a theft loss as a business deduction for net operating loss purposes, though under current 26 U.S.C. § 172 the NOL cannot generally be carried back — it carries forward against up to 80 percent of taxable income. Even so, a certain deduction next April routinely beats a contingent recovery five years out.
What red flags should New Mexico investors and their advisors watch for?
The Columbia Bank ruling carries an uncomfortable inversion: the facts said to establish the bank’s knowledge — commingling, investor money paying investor “returns,” insider personal-account transfers — are facts a diligent advisor can probe before wiring a dollar. Ask where funds are custodied and whether accounts are segregated; demand audited financials; insist on third-party escrow for real estate deals. Steady above-market returns, pressure to roll over rather than withdraw, and paperwork that swaps entity names midstream are the signals a bank’s due diligence flags.
New Mexico’s fraud landscape has its own patterns: affinity fraud in Santa Fe and Las Cruces churches and retirement communities, unregistered oil-and-gas working-interest offerings sold off the Permian Basin boom in Hobbs and the Lea and Eddy County oilfields, and crypto pig-butchering operations targeting professionals statewide. In each, the pitch borrows credibility — a congregation, a producing basin, a slick app — the numbers never earn.
| Recovery avenue | Who pays | Typical timeline | Key limitation |
|---|---|---|---|
| Receivership / bankruptcy claim | Estate assets, clawed-back transfers | 3–10 years | Pro rata; often pennies on the dollar |
| Third-party suits (banks, auditors, promoters) | Deep-pocket defendants, insurers | 3–7 years if claims survive | Actual knowledge + substantial assistance is a high bar |
| SIPC protection | Securities Investor Protection Corp. | 1–3 years | Member broker-dealers only; $500,000 cap ($250,000 cash) |
| Theft loss deduction (Rev. Proc. 2009-20) | Reduced federal and NM income tax | Next filing season after charges | 95%/75% of net investment; profit motive required |
Frequently Asked Questions
Is a Ponzi scheme loss still deductible after the Tax Cuts and Jobs Act and the OBBBA?
Yes. The § 165(h)(5) suspension, made permanent by the OBBBA, applies only to personal casualty and theft losses. A Ponzi loss from an investment made for profit remains fully deductible as an ordinary loss under § 165(c)(2) per Rev. Rul. 2009-9.
Do I have to sue anyone to use the Rev. Proc. 2009-20 safe harbor?
No. The safe harbor is triggered by government action against the scheme’s lead figure — a criminal charge, or a civil complaint paired with an admission or an appointed receiver or trustee. Choosing not to pursue third-party recovery actually raises the percentage from 75 to 95 percent.
What happens if I withdrew money from the scheme before it collapsed?
Withdrawals reduce your deductible qualified investment dollar for dollar. If you withdrew more than you invested, you are a “net winner” who may face a clawback suit for the fictitious profits, because good faith protects only principal under 11 U.S.C. § 548(c) and New Mexico’s Uniform Voidable Transactions Act.
Can I amend old returns to remove the phantom income I reported?
You can amend open-year returns to strip out fictitious income instead of using the safe harbor — but that route forfeits Rev. Proc. 2009-20 protection, requires proving discovery year and recovery prospects the hard way, and cannot reach closed years. The safe harbor instead builds previously taxed phantom income into the deductible loss.
How fast can a fraud victim actually see money from the theft loss deduction?
Often within months. Once the lead figure is charged, the deduction goes on that year’s return — no lawsuit, no waiting for distributions. Excess losses become a net operating loss carrying forward against up to 80 percent of taxable income, since current § 172 generally allows no carryback.
How North Star Law Firm Can Help
North Star Law Firm helps investment fraud victims across New Mexico — Albuquerque, Santa Fe, Las Cruces, and beyond — coordinate estate claims, third-party recovery options, clawback demands, and the tax recovery most victims leave on the table. Phillip Zagotti, JD/CPA, represents New Mexico taxpayers before the IRS and the U.S. Tax Court under Circular 230, and the firm’s combined federal tax defense and tax planning perspective fits a problem where safe-harbor elections, netting computations, and litigation strategy intertwine. If you have lost money in a Ponzi scheme or suspect an investment is not what it claims, contact the firm for a free consultation before deadlines close any doors.