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Opalesque Futures Intelligence

CFTC Goes After US Bank in PFG Case. The Smoking Gun Likely Found in Depository Agreement

Friday, June 28, 2013

By Mark Melin

The Commodity Futures Trading Commission (CFTC) recently filed a lawsuit against US Bank in what could turn out to be an interesting case.  As a depository bank for futures brokerage firm Peregrine Financial Group (PFG), the bank was holding assets in the fraud case when $215 million of PFG's client assets disappeared.  Stringent rules have been in place for decades that specify depository processes for handling customer segregated funds with strong penalty already on the books for misuse of fiduciary responsibility.

Outside his new corporate headquarters in Iowa during better times, Russ Wasendorf Sr was later convicted of fraud after a suicide attempt.
PFG, Fraud and "Senior"

PFG's CEO Russell  Wasendorf Sr., now in his 70s, received a harsh 50 year sentence and was ordered to pay $215 million in restitution after his conviction.  Mr. Wasendorf admitted providing the bank false documents and attempted to take his life in a failed suicide bid when the fraud was discovered by regulators.  The brokerage executive was fond of a jet-setting lifestyle and at one point flew around the world in a private jet to rock concerts with his second wife and owned a variety of companies including several restaurants. A former documentary film director, Mr. Wasendorf was known to spend lavishly on industry parties to promote himself as one of the top industry players, a goal that remained elusive. He had PFG built a spectacular $20 million corporate facility in a small Iowa town just prior to the firm's demise in July of 2012. Questions still persist as to the whereabouts of missing money. Now without access to capital and much of his family disowning him, he is now said to be in prison contemplating a memoir.  Mr. Wasendorf, known as "senior," is author of several financial books and, in better times, had talked about writing a fiction novel.

The PFG incident marked the first time in history a depositor lost money out of a customer segregated futures account that resulted in the brokerage firm CEO being convicted of fraud.

PFG had both a retail direct managed futures business headquartered in Chicago and an institutional managed futures division headquartered in Los Angeles that worked with Registered Investment Advisors (RIAs).

CFTC Pursues Violators of Bank Fiduciary Responsibility

In a statement discussing the matter, 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."

This could be an apparent reference to the generally known fact that banks have extraordinary fiduciary responsibilities when handling customer segregated funds.

This prison photo was splashed on the cover of the New York Times business section after his failed suicide attempt and later admission of guilt.
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.

US Bank Defends Itself

US Bank has vowed to defend itself but did not comment directly on the issue as to if they had a signed depository agreement between US Bank and PFG.  If they had such an agreement in place, one might expect US Bank to be in a different legal position than without the agreement.  Instead, the firm released a blanket release to the press:

* Like the CFTC, we are sympathetic to the victims of Mr. Wasendorf's self-admitted fraud.
* U.S. Bank was also a victim of the same fraud - one that the CFTC failed to detect.
* This lawsuit is without merit and represents an inappropriate attempt to reassign blame to U.S. Bank.
* The regulatory program in place at the time allowed Wasendorf to intercept regulator communications that were intended for the bank and to falsify bank responses to those communications, all without the bank's knowledge - as Mr. Wasendorf has already admitted.
* Wasendorf's scheme to keep the bank in the dark included creating a P.O. Box to intercept communications from the regulator to the bank.
* As he has admitted, Wasendorf actively deceived the bank.  At no time did we have any knowledge that Wasendorf was running a fraudulent scheme.
* The bank did nothing wrong and we will defend ourselves vigorously.
* Banks are not responsible for losses generated by customers who are fraudsters.
* The lawsuit itself accuses the bank of violating technical regulations that have never been interpreted by any Court to apply when a bank is not notified that it was holding Customer Segregated funds.
* The CFTC's theory against the bank is unprecedented, seeking to impose responsibilities that the bank never had and alleging violations that it never committed.

This article was published in Opalesque Futures Intelligence.
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