Last year’s demise of Peregrine Financial Group has had considerable repercussions, it seems. The U.S. Commodity Futures Trading Commission (CFTC) has today filed a Complaint in the U.S. District Court for the Northern District of Iowa against U.S. Bank National Association (U.S. Bank) for unlawfully using and holding Peregrine Financial Group, Inc.’s (Peregrine) customer segregated funds.
Peregrine Financial Group began being probed by the Federal Bureau of Investigations (FBI) in July last year, as well as being the subject of a simultaneous lawsuit against the company by the CFTC in the wake of a suicide attempt by the firm founder Russell Wasendorf Senior.
It was found that Peregrine Financial Group had an alleged $200 million shortfall in customer funds, according to a Commodity Futures Trading Commission complaint filed today in federal court in Chicago on July 11, 2012.
In August last year, just a month after the CFTC issued proceedings, the National Futures Association went live with its policy of supervising the segregated accounts of financial services providers in the United States. Should such a policy have come into being beforehand, would have avoided situations such as that of Peregrine Financial Group.
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In the aftermath of such a high profile event, it could be considered quite remarkable that a national bank would expose itself to regulatory scrutiny with relation to the client funds of the very same company, due to the very same alleged infringement. U.S. Bank is the fifth largest bank in the country and maintains branch offices in Cedar Falls, Iowa, where Peregrine and its owner, Russell R. Wasendorf Senior were located.
The Commodity Exchange Act (CEA) and CFTC regulations prohibit depository institutions, like U.S. Bank, from using or holding funds that belong to customers of a Futures Commission Merchant (FCM) as though they belong to anyone other than the customers, and also prohibit the extension of credit based on such funds to anyone other than the customers.
The Complaint alleges that U.S. Bank was a depository institution serving Peregrine, a registered FCM, and Wasendorf since 1992. From approximately September 2008 to July 2012, U.S. Bank unlawfully accepted Peregrine’s customers’ funds as security on loans it made to Wasendorf, his wife, and his construction company, Wasendorf Construction, L.L.C., to build an office complex for Peregrine in Cedar Falls, Iowa. The Complaint further alleges that from approximately June 2008 to July 2012, U.S. Bank improperly held Peregrine’s customers’ funds in an account U.S. Bank treated as Peregrine’s commercial checking account and knowingly facilitated Wasendorf’s transfers of millions of dollars of customers’ funds out of this account to pay for Wasendorf’s private jet, his restaurant, and his divorce settlement, among other things. U.S. Bank knew that these transfers were not for the benefit of Peregrine’s customers, according to the Complaint.
David Meister, the CFTC’s Director of Enforcement, said: “The Commodity Exchange Act and Commission rules protecting customer funds impose obligations on banks that hold those funds. As should be apparent from today’s action, we will seek to hold a bank to account if it falls short on complying with customer fund protection obligations. Wasendorf stole vast sums of customer money, but his crimes do not excuse U.S. Bank from its own independent responsibilities.”
According to the Complaint, Wasendorf defrauded more than 24,000 Peregrine clients and misappropriated more than $215 million over two decades using a customer segregated account at U.S. Bank. In connection with that fraud, Wasendorf misrepresented to the National Futures Association and to Peregrine’s auditor that Peregrine’s customer segregated account at U.S. Bank contained $200 million or more, when in fact the average balance since May 2005 was only $15.7 million. On July 10, 2012, the CFTC instituted a civil action against Wasendorf and Peregrine, CFTC v. Peregrine Financial Group, Inc. and Russell Wasendorf Sr., 1:12-cv-05383 (N.D. IL July 10 2012) (see CFTC Press Release 6300-12, July 10, 2012). Wasendorf was also criminally charged by the United States Attorney’s Office for the Northern District of Iowa, pled guilty, and on January 23, 2013 was sentenced to 50 years in prison and ordered to pay more than $215 million in restitution. United States v. Russell Wasendorf, Sr., 12-cr-2021-LRR.
In this litigation, the CFTC seeks an injunction against U.S. Bank for further violations of the CEA and CFTC Regulations, restitution, disgorgement, and civil monetary penalties, among other appropriate relief.
The following CFTC Division of Enforcement staff members are responsible for this case: Robert Howell, Joy McCormack, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard Wagner