The litigation, brought by holders of more than $270 million in asset-backed notes, accused JPMorgan Chase, Barclays, and Fifth Third of willful blindness. Plaintiffs—including investment funds managed by Janus Henderson and Ellington Capital Management—argued the banks enabled a systemic deception by securitizing loans while ignoring internal audits that revealed fabricated cash flows and inaccurate reporting. By the time Tricolor filed for liquidation in September, some of these notes had plummeted to less than 10 cents on the dollar.

Defense counsel successfully argued that the investors’ complaints amounted to allegations of negligence rather than intentional securities fraud. Under New York federal law, failing to stop a client’s misconduct does not inherently constitute fraud, a standard the banks leaned on to secure the dismissal. The ruling provides a reprieve for the three institutions, all of which have already reported nine-figure losses stemming from their involvement with the lender. Meanwhile, criminal proceedings continue against former Tricolor CEO Daniel Chu and former COO David Goodgame, who face charges in Manhattan for allegedly falsifying loan data and double-pledging collateral.