Normally a trustee or investors sue the banks for funds
lost in a Ponzi scheme. Banks are accused of negligently not monitoring their accounts
for fraud or, worse yet, for aiding and abetting the Ponzi scheme perpetrator's
fraud. Federal regulators like the SEC and CFTC go after the bad guys and are
not generally in the business of suing the banks who held the money.
In the Peregrine Financial Group, Inc. fraudulent scheme
- generally believed to be a Ponzi scheme if not just one massive embezzlement
- the CFTC has just sued U.S. Bank for its role in the fraudulent scheme
perpetrated by Russell Wasendorf, Sr., and Peregrine. Based in Cedar Falls,
Iowa, Wasendorf defrauded 24,000 victims out of $215 million over 20 years.
After his unsuccessful suicide attempt and subsequent
arrest, Wasendorf pleaded guilty and was sentenced to 50 years. He was also
ordered to pay full restitution.
The CFTC complaint, filed on June 5, 2013, alleges that Peregrine
was a "futures commission merchant" registered with the CFTC and that Peregrine
deposited more than $308 million of its customers' funds with U.S. Bank. Under
the Commodity Exchange Act, 7 U.S.C. §§ 1 et
seq., and CFTC regulations, 17 C.F.R. §§ 1 et seq., neither U.S. Bank nor Peregrine was permitted to "hold,
dispose of, or use" these customer funds as though they belonged to anyone
other than Peregrine's customers.
Nevertheless, the CFTC alleges, U.S. Bank held and used
Peregrine's customer funds as security on a $3 million loan to Wasendorf and
his wife and to make a $6.4 million loan to Wasendorf Construction, L.L.C. The
CFTC also alleged that customer funds were in an account that U.S. Bank treated
as if it were Peregrine's commercial checking account and knowingly allowed and
facilitated Wasendorf's transfers of customer funds out of this account to pay
for Wasendorf's private airplane, his restaurant and his divorce settlement,
among other things. It is alleged that U.S. Bank knew that these transfers were
not for the benefit of Peregrine's customers.
An intriguing aspect of the complaint alleges that "Banker
A," an "Assistant Relationship Manager" who worked at a Cedar Falls branch of
the Bank, handled much of Peregrine's transactions for the Bank. The complaint
does not identify Banker A by name or disclose why her identity is concealed. The
CFTC alleges that Wasendorf instructed the Bank to communicate only with him,
and that any communications about the Bank had to be with Banker A. In summary,
the complaint alleged that, "U.S. Bank knew that Wasendorf's mandates
concerning the 1845 Account were highly unusual."
The complaint also painstakingly describes how "Banker A"
and U.S. Bank knew that Peregrine's account was a customer segregated account
and that the funds in it came from customers.
The complaint goes on to allege that the Bank knowingly facilitated the
transfer of customer funds in violation of the commodities laws. Although it
comes close, the complaint does not allege that the Bank knew of Peregrine's
The CFTC seeks to enjoin U.S. Bank's unlawful practices
as well as restitution, disgorgement and civil monetary penalties. It does not
state that any recoveries will be distributed to Wasendorf's victims.
U.S. Bank responded to the complaint with the following
statement: "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 Bank further noted,
"Banks are not responsible for losses generated by customers who are
On the legal merits of the CFTC's claims, U.S. Bank
responded: "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."
The CFTC's complaint is here.
This is not the first effort by the CFTC to pursue a
bank's improper conduct under the commodities laws. In 2012, JPMorgan paid $20
million to settle CFTC claims over its unlawful handling of customer segregated
funds at Lehman Brothers. The CFTC press release announcing this settlement is
It remains to be seen whether the Peregrine trustee will
also pursue claims against U.S. Bank for the conduct alleged in the CFTC
complaint. Given the numerous allegations of the Bank's knowledge of various
issues, a complaint for negligence, breach of fiduciary duty, or possibly
aiding and abetting does not seem out of the realm of possibilities.
Read additional articles at The Ponzi Scheme
Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal
Resource for Unraveling Ponzi Schemes (LexisNexis 2012), along with
Hon. Steven Rhodes. The Ponzi Book, recently reviewed by the ABI Journal and Commercial
Crime International, is available for purchase at www.lexisnexis.com/ponzibook,
and more information about the book can be found at www.theponzibook.com.
Watch Kathy's interview on the The Not So Legal Show.
For more information about LexisNexis
products and solutions connect with us through our corporate site.