New York sues Zelle, says security lapses led to 'rampant' consumer fraud

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.O Venmo and Block's XYZ.N Cash App.

Its parent, Early Warning Services, is owned by seven large U.S. banks: Bank of America BAC.N, Capital One COF.N, JPMorgan Chase JPM.N, PNC PNC.N, Truist TFC.N, US Bank USB.N and Wells Fargo WFC.N.

James said Zelle's parent and the banks knew for years that the platform was vulnerable to fraudsters but ignored basic safeguards, with the banks sometimes ignoring customer complaints while Zelle let fraudsters stay on the platform.

The result was "rampant" fraud, according to the complaint.

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.

James said 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."

The lawsuit seeks to require Zelle to beef up its anti-fraud protections, and pay restitution and damages to defrauded New Yorkers.

"No one should be left to fend for themselves after falling victim to a scam," James said in a statement.

Early Warning Services did not immediately respond to a request for comment. The banks were not named as defendants.

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.