Have you heard about the story by a reporter for the New York Daily News who says he inadvertently started a rumor that Senator Chuck Hagel, President Obama's nominee to head the Defense Department, received speaking fees from a group called Friends of Hamas? The reporter, Dan Friedman, wrote in a piece Monday that earlier this month, he called a congressional staffer to check out reports that Hagel had received fees from controversial groups. He pressed for details on the groups, using what he considered farcical, made-up names like "Junior League of Hezbollah" and "Friends of Hamas." The next thing Friedman knew, conservative websites published speculation that Hagel had accepted fees from Friends of Hamas, citing Capitol Hill sources. Eventually, after mainstream sites questioned the existence of the group, the story fizzled.

"Friends of Hamas" may be fictional, but according to ongoing litigation against financial institutions including Arab Bank, National Westminster Bank and Credit Lyonnais, Hamas and other terror groups had, at least, friendly customer relationships with their bankers. In cases in federal court in Brooklyn and Manhattan, victims of terrorist acts have asserted that the banks violated the Anti-Terrorism Act (ATA) by enabling groups like Hamas to finance bombings. More than a half-dozen suits involving thousands of terror victims have survived defense motions to dismiss and are headed for summary judgment rulings.

The banks believe their defenses received a boost last week from the 2nd Circuit Court of Appeals in a decision captioned Rothstein v. UBS. A three-judge appellate panel (Judges Amalya Kearse, Raymond Lohier and Christopher Droney) upheld the dismissal of an ATA case against UBS, finding that the plaintiffs hadn't shown a proximate link between UBS's admission of forbidden sales of U.S. currency to Iran and acts of terror by Iran-sponsored groups like Hamas and Hezbollah. The plaintiffs had argued that because UBS was fined $100 million for breaching its contract with the Federal Reserve by engaging in transactions with Iran, the bank should bear the burden of showing that its currency transactions with Iran were not used to finance terror. The 2nd Circuit disagreed on burden shifting, holding that the language of the ATA indicates that Congress wanted terror victims to show a direct nexus between their injuries and defendants' actions. In this case, the appeals court said, the plaintiffs couldn't show that Iran specifically used U.S. currency purchased from UBS to finance terror operations by groups it backed. The ruling said the ATA does not carry a strict liability standard that would open up claims against anyone who provided money to a state sponsor of terrorism. It also held there's no cause of action for aiding and abetting under the ATA.

The 2nd Circuit's ruling came down on Thursday. Within a day, bank defense lawyers from Mayer Brown and Cleary Gottlieb Steen & Hamilton had sent letters to courts overseeing litigation against Arab Bank, NatWest and Credit Lyonnais, arguing that the decision contradicts rulings in their cases. Arab Bank, which has asked the 2nd Circuit to reconsider its affirmation of crippling sanctions against the bank, said in its letter that the Rothstein decision underscores errors by the trial judge in its case, U.S. Senior District Judge Nina Gershon. The other two banks, in a letter to U.S. District Judge Dora Irizarry of Brooklyn, said that the Rothstein ruling holds terror victims to an exacting standard of proof that they haven't met in cases against NatWest and Credit Lyonnais. The letter asked the judge to consider the new 2nd Circuit decision in weighing their pending summary judgment motions.

But lawyers for terror victims told me that Rothstein is distinguishable from the other ATA cases against banks. UBS was not accused of transferring money directly to terror groups but of indirectly funding terrorism through money transfers to Iran, a state sponsor. The other ATA cases accuse banks of engaging in banking activities directly on behalf of groups like Hamas. "Had UBS supplied cash money directly to Hamas, the outcome would have been different," said Robert Tolchin, who represents the Rothstein plaintiffs. "I don't think the decision will be too broadly applicable." (Tolchin also said that he and co-counsel haven't yet decided what their next move will be in the Rothstein case.)

Gary Osen, speaking on behalf of plaintiffs suing all three of the other banks, said the Rothstein decision should have "zero relevance," though he cautioned that "it remains to be seen" how broadly other courts will interpret it. Osen called the Rothstein plaintiffs' attempt to extend liability to UBS "idiosyncratic and creative," but said victims in the cases against Arab Bank, NatWest and Credit Lyonnais have all alleged direct cash transfers to terror groups. And since, under the U.S. Supreme Court's 2010 ruling in Holder v. Humanitarian Law Project, plaintiffs don't have to show that transfers financed specific acts of terror, Osen said that terror victims in those cases can show proximate cause. "There hasn't been any court that has said you have to show that bullets were bought with the transferred money," he said. (For the record, in responses to defendants' letters to courts about the Rothstein ruling, plaintiffs in the Arab Bank case wrote that the decision has nothing to do with the issues of judicial discretion before the 2nd Circuit in their case; plaintiffs in the NatWest case said they have offered ample evidence of proximate cause.)

Osen said that he would have preferred that the 2nd Circuit had specifically noted the distinction between the allegations in the Rothstein case and those in other 2nd Circuit cases involving ATA claims against banks. Nevertheless, he said that Arab Bank's attempt to extrapolate the Rothstein decision in its own 2nd Circuit appeal is a Hail Mary.

Plaintiffs' lawyers in the cases against accused terrorism financiers are already bracing for the impact of the U.S. Supreme Court's opinion in Kiobel v. Royal Dutch Petroleum, which was argued in October but still hasn't been decided. If the court sides with Shell and its corporate amici, its ruling will knock foreign plaintiffs out of the terror finance litigation, leaving only American nationals suing under the ATA. Court interpretations of Rothstein will go a long way toward determining if that law has any teeth.

(This story has been corrected. A previous version referred to money transfers from UBS to Iran. U.S. currency was sold to Iran.)

(Reporting by Alison Frankel)

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