Bank knew about the Russell Wasendorf thefts

Feds: U.S. Bank knew about Wasendorf thefts

11:39 AM, Jun 5, 2013 | by Victor Epstein | Comments Categories: Breaking news, Crime & Courts, Des Moines Business

The U.S. Commodity Futures Trading Commission filed a lawsuit Wednesday against disgraced financier Russell Wasendorf’s bank for allegedly allowing the Iowan to use customer funds at his futures brokerage like a commercial checking account.

Minneapolis-based U.S. Bank NA, the fifth-largest commercial bank in the U.S., allowed Wasendorf to borrow against customer funds and use them for purchases ranging from a private plane to a divorce settlement, according to the CFTC.

The complaint seeks restitution for customers who lost money when Peregrine Financial Group imploded July 10 as a result of a 20-year con that undermined consumer confidence in the $37 trillion futures industry. The Cedar Falls business filed for bankruptcy one day after a botched suicide attempt by Wasendorf, which included three notes detailing how he pilfered more than $200 million from customer funds over 20 years.

“Wasendorf stole vast sums of customer money, but his crimes do not excuse U.S. Bank from its own independent responsibilities,” CFTC enforcement director David Meister said in a 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.”

The legal action by CFTC comes at a time when the administration of President Barack Obama is facing public criticism for failing to imprison a single high-level executive from the so-called “Too Big to Fail” banks, whose risky investments helped precipitate the global financial meltdown that began in late 2007. It is the first in the Peregrine saga against anyone other than Wasenborf or Peregrine.

“Customer funds should always — 100 percent of the time — be set aside and held sacrosanct,” CFCT Commissioner Bart Chilton said Wednesday in an exclusive interview with the Register. “When commingled and used like slush fund checking accounts for firms and or individuals, that’s a major no no. We can’t stand for it.”

Wasendorf Sr., 65, was sentenced to 50 years in prison on Jan. 31 for stealing $215.5 million from more than 13,000 customers at Peregrine, which also did business under the “PFGBest” name. The so-called “Madoff of the Midwest” is now a federal prisoner in the maximum security federal prison in Terre Haute, Ind.

The CFTC complaint accuses U.S. Bank of knowingly facilitating the transfers of millions of dollars of Peregrine customer funds from 2008 to 2012.

“U.S. Bank knew that these transfers were not for the benefit of Peregrine’s customers,” the CFTC said.

As a futures commodity merchant, Peregrine served as an intermediary between investors and futures markets, and was allowed to hold customer funds. However, the company and its owner were legally precluded from using them for their own purposes.

U.S. Bank Senior Vice President Tom Joyce said it’s being improperly targeted by the CFTC, which is seeking to create new responsibilities for banks holding segregated customer funds. He said the bank was also a victim of the Wasendorf fraud, which was facilitated by regulatory shortcomings.

“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,” he said. “At no time did we have any knowledge that Wasendorf was running a fraudulent scheme. The bank did nothing wrong and the bank will defend itself vigorously. Banks are not responsible for losses generated by customers who are fraudsters.”

Wednesday’s legal action by the federal agency charged with regulating the U.S. commodity, futures and option markets was lauded by Wasendorf’s victims, who expressed hope it will help them recoup more of their missing funds. U.S. Bancorp, which does business under the U.S. Bank brand name, reported $1.43 billion in earnings in the first quarter and total assets of $355 billion. A court-appointed trustee and receiver have been searching for Wasendorf and Peregrine assets and selling them off to cover a $190 million shortfall in the $400 million owed to their bilked customers. Most have received between 29 cents and 39 cents on the dollar.

“If anyone has deep enough pockets to get their money back it’s U.S. Bank,” said Carley Garner, a senior market analyst at Las Vegas-based DeCarley Trading LLC. “This lawsuit by the CFTC is shocking and it’s not the kind of thing they file on a whim.”

Garner estimated that her 4-year-old investment firm has regained about 60 percent of its former revenue in the 11 months since the scam broke. DeCarley Trading worked exclusively with Peregrine and had about $3.5 million of assets under management before the scandal.

“We’re cautiously optimistic that this will increase the odds of former (Peregrine) clients recouping the lion’s share of their money, and applaud the CFTC for their efforts,” said Jeff Malec, chief executive officer of Attain Capital. The Chicago investment firm had about half its assets frozen immediately after the Peregrine bankruptcy.

The complaint against U.S. Bank adds new life to the Wasendorf saga, which has spawned numerous other lawsuits and prompted a review of regulatory procedures in the futures industry.

The National Futures Association has embraced new mandatory online verification procedures to protect customer funds and rebuild confidence in the futures industry. Dennis Kelleher, president of Better Markets, a Washington, D.C.-based nonprofit organization that promotes the public interest in the financial markets, said the U.S. Bank lawsuit is part of that process.

“Financial crimes almost always require unwitting, negligent or greedy accomplices, but they are rarely prosecuted or held accountable,” Kelleher said. “The CFTC suing those alleged to have enabled Wasendorf to steal from his clients sends a long-overdue, clear message that crime should not pay for anyone.”

The civil lawsuit could impact at least two other cases related to the Peregrine collapse. One is a class-action lawsuit in which U.S. Bank, which is a named defendant. The other is a lawsuit that his son, Russell Wasendorf Jr., brought against the bank in a bid to escape responsibility for the $6.6 million remaining on the mortgage for Peregrine’s $24 million headquarters outside Cedar Falls.

Court officials refer to Peregrine’s former owner, founder and chief executive officer as “Senior” and his son, who now lives in the Orlando area and served as its president, as “Junior.”

Junior signed the mortgage loan for the headquarters, which was issued by U.S. Bank. A pending deal to sell the property for $3.3 million would leave the younger Wasendorf with enough debt to push him bankruptcy, according to his attorney Nicholas Iavarone.

Junior’s lawsuit was filed in September and withdrawn in October. It accused U.S. Bank of knowing about the elder Wasendorf’s criminal behavior when it approached Junior to sign the mortgage. It claimed Junior would never have done so had he known the true nature of Peregrine’s finances and requested the contract be voided on those grounds.

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