Feds Sue U.S. Bank Over Misuse Of Funds Tied To Fraud
Federal authorities sued U.S. Bank Wednesday, accusing the Minneapolis-based bank of illegally holding and using funds that Peregrine Financial’s owner was later convicted of stealing from his clients.
Russell Wasendorf, Sr., founder of Peregrine Financial Group, Inc., was sentenced in January to 50 years in prison for stealing $215 million from his investors over the course of two decades.
U.S. Bank is the head bank of U.S. Bancorp, Minnesota’s largest bank holding company. It has branch offices in Cedar Falls, Iowa, where Peregrine and Wasendorf were located.
The U.S. Commodity Futures Trading Commission (CFTC) accuses U.S. Bank of unlawfully unaccepting Peregrine’s customers’ funds as security on loans it made to Wasendorf, his wife, and his construction company.
U.S. Bancorp spokesman Tom Joyce said in a statement that, while the corporation is sympathetic to the victims of Wasendorf’s fraud, U.S. Bank is 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,” Joyce said. “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.”
The CFTC’s lawsuit alleges that from June 2008 to July 2012, U.S. Bank knowingly facilitated Wasendorf’s transfers of millions of dollars of customers’ funds to pay for Wasendorf’s private jet, his restaurant, and his divorce settlement, among other things.
The lawsuit claims that U.S. Bank allowed the account that held millions of dollars of Peregrine customers’ funds to be accessed only by Wasendorf. Wasendorf required that no one at U.S. Bank should speak with any Peregrine personnel, except himself and his personal assistant, regarding the account. The CFTC alleges that U.S. Bank knew these mandates were highly unusual.
U.S. Bank denied any knowledge of Wasendorf’s deceit: “At no time did we have any knowledge that Wasendorf was running a fraudulent scheme,” said Joyce. “Banks are not responsible for losses generated by customers who are fraudsters. The bank did nothing wrong and the bank will defend itself vigorously.”
Wasendorf defrauded more than 24,000 Peregrine clients using his customer-segregated account at U.S. Bank, according to the CFTC. Also, in connection with the fraud, the complaint alleges that Wasendorf misrepresented to the National Futures Association and to Peregrine’s auditor that the account at U.S. Bank contained $200 million or more, when in fact the average balance since May 2005 was only $15.7 million.
“The Commodity Exchange Act and Commission rules protecting customer funds impose obligations on banks that hold those funds,” CFTC Director of Enforcement David Meister said in statement. “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.”