By Jonathan Stempel
NEW YORK (Reuters) -A federal judge on Tuesday rejected Citigroup (NYSE:C)'s bid to dismiss a lawsuit by New York Attorney General Letitia James claiming it failed to protect customers from online scammers and refused to reimburse customers who were victimized.
U.S. District Judge Paul Oetken in Manhattan said the bank's Citibank unit must face James' claim it violated a 1978 federal law concerning electronic wire transfers, and parts of three other claims.
Oetken said Congress intended the 1978 law, the Electronic Fund Transfer Act, to protect consumers from sophisticated frauds involving technologies they may not understand, leaving banks in a better position to shoulder the risks of fraud.
In seeking a dismissal of the lawsuit last April, Citigroup argued that the law expressly excluded wire transfers.
But in his 62-page decision, Oetken said "Citibank's reading would operate in derogation of the statutory purpose."
The judge dismissed some claims against New York-based Citigroup, the third-largest U.S. bank.
Citigroup said in a statement it was disappointed and was evaluating its next steps. "The industry-standard practices we employ have long been recognized as satisfying applicable law," it said.
James said the decision would help her office ensure that Citigroup follows the law to protect customers.
"When New Yorkers deposit their money in a bank, they expect it to be kept safe from scammers and thieves," the attorney general said in a statement.
James sued last January, saying scammers stole millions of dollars from Citibank customers because the bank's security systems could not investigate red flags such as unrecognized devices, changes in user names and passwords, and "phishing."
In one instance, a customer allegedly lost $40,000 after clicking a text message link that appeared to be from Citibank.
James also accused Citigroup of coercing customers into signing affidavits that limited their ability to recoup losses, and then summarily rejected reimbursement claims.
The lawsuit seeks restitution for customers who were denied reimbursement over six years, and a $5,000 civil fine per violation.
Citigroup has acknowledged online wire fraud as a "real" problem, but said its systems stop "countless" fraudulent transactions every day.
The case is New York v Citibank NA, U.S. District Court, Southern District of New York, No. 24-00659.