* Lawsuit says bank knew PFG accounts held customer funds
* Says bank let PFG chief use accounts to secure private
By David Sheppard and Tom Polansek
NEW YORK/CHICAGO, June 5 U.S. regulators on
Wednesday launched the first lawsuit against a bank tied to the
blow-up of brokerage Peregrine Financial, alleging U.S. Bancorp
knowingly let Russell Wasendorf Sr. use customer money
held at the bank to fund his lavish lifestyle.
Peregrine founder Wasendorf, who has been dubbed 'the
Midwest Madoff' for his near two-decade long scheme, began
serving a 50-year sentence in February for bilking $215 million
The lawsuit, brought by the U.S. Commodities Futures Trading
Commission (CFTC), alleges a unit of U.S. Bancorp let Wasendorf
secure loans and other funding against money it knew belonged to
his brokerage's customers.
"(The bank) 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," the CFTC said in the lawsuit.
While former Peregrine clients were hopeful the lawsuit
might help make them whole, legal experts said the lawsuit is
also the most serious attempt yet by regulators to hold banks
responsible for how they monitor customer funds placed with them
by brokerages. They cautioned, however, that similar cases have
faced a number of steep legal hurdles.
U.S. Bancorp spokesman Tom Joyce denied the allegations and
said the CFTC case was an attempt to deflect attention from the
regulator's failure to uncover Wasendorf's abuse of customer
funds, which was discovered last summer after he wrote a
confessional note prior to a botched suicide attempt.
"This lawsuit is without merit and represents an
inappropriate attempt to reassign blame to U.S. Bank," Joyce
Michael Greenberger, a former director of the CFTC's trading
and markets division, said that whatever the outcome of the
case, banks were now on notice that regulators expect them to
keep an eye on their brokerage clients.
"However this complaint turns out, I think it's going to be
a lesson to depository institutions to take their responsibility
seriously when they take in segregated account funds from
futures commission merchants," Greenberger, who now works as a
law professor, said.
"On its face it seems as if CFTC has a lot of evidence in
its hands that go to the merits of this case," he added.
The CFTC complaint, filed in the U.S. District Court for the
Northern District of Iowa, alleged U.S. Bank NA, a unit of U.S.
Bancorp, accepted customer funds as security on multimillion
dollar loans to Wasendorf, his wife and his construction
"Although the (account) was a customer segregated account
containing Peregrine's customer funds, U.S. Bank ... treated the
account as if it were a Peregrine commercial checking account."
The complaint is seeking permanent injunction, civil
monetary penalties, and other equitable relief.
The revelation of the nearly two-decade long Wasendorf fraud
last summer dealt another blow to confidence in the futures
industry after the failure of MF Global in late 2011, and drew
comparisons with New York money manager Bernard Madoff's massive
Ponzi scheme due to the length of his deception. Madoff is
serving a 150-year prison sentence.
The CFTC lawsuit singles out a female employee at the bank's
Cedar Falls, Iowa branch, identified only as 'Banker A', for
having particularly close dealings with Wasendorf.
"Throughout the relevant period, Banker A personally
facilitated telephonic and inbranch deposits and wire transfers
of Peregrine customer funds," the CFTC lawsuit said.
"Banker A and other U.S. Bank personnel perceived Wasendorf
as a successful, desirable bank client with the potential to be
a profitable, high growth client."
An earlier investigation into Wasendorf's fraud by the
Berkley Research Group on behalf of the National Futures
Association (NFA) named Hope Timmerman as the employee who
handled the main Peregrine account at U.S. Bank.
Wasendorf Sr. said that he used little more than a rented
post office box, Photoshop and ink jet printers to fake bank
statements and hide money from regulators for years. He doctored
the bank statements to show that accounts held more money than
they actually did, while using clients' money to keep the
company afloat and pay for his expensive home, private plane and
extensive wine collection.
"U.S. Bank allowed Wasendorf to limit access to, and
information about, an account holding millions of dollars of
Peregrine's customer funds to only Wasendorf," the CFTC case
"Wasendorf was able to represent to the NFA and Peregrine's
auditor that Peregrine maintained a customer segregated account
at U.S. Bank that eventually contained more than $200 million,
when in fact the average balance since May 2005 was only
approximately $15.7 million," the CFTC case said.
MISSING CUSTOMER MONEY
Attain Capital chief executive, Jeff Malec, who saw his
business drop by 80 percent after it lost money in the Wasendorf
fraud, said he had been advising clients not to take buyouts of
their claims "until and unless the big pockets in this case,
U.S. Bank, is found innocent of any wrongdoing," he said.
"(A successful CFTC case) would be a huge plus for the
futures industry in restoring the trust and faith in the
customer segregated account structure," he added.
Other Peregrine customers, the majority of whom have
received less than one-third of their money back, remained
critical of the CFTC.
"It was the regulators who allowed all this to go on," said
Joe Berger, who had $100,000 in a Peregrine account when the
fraud came to light.
"Now regulators riding to my rescue at this date, I don't
have a lot of confidence in them."
Peregrine Financial's trustee, Ira Bodenstein, is also
contemplating a lawsuit against U.S. Bank to recoup customer
funds. A lawyer for the trustee, Bob Fishman, said the CFTC
lawsuit does not change that.
The outcome of the CFTC case could affect separate civil or
class-action lawsuits, legal experts said, but they cautioned
the case could take many years.
A previous attempt by regulators to sue the bank of failed
brokerage Sentinel Management Group has been winding its way
through the courts for more than five years.
But in 2012, JPMorgan paid $20 million to settle
with the CFTC over its unlawful handling of customer segregated
funds at Lehman Brothers in the wake of the broker-dealer's
collapse during the financial crisis.
James Koutoulas, a lawyer and money manager, who co-founded
the Commodity Customer Coalition to advocate for former MF
Global and Peregrine customers offered cautious optimism on the
CFTC suit on Wednesday.
"It's really the first ray of hope that we've seen for a
while, and it's a good one," Koutoulas said of the complaint,
describing the CFTC's case as "pretty damning".
U.S. Bancorp shares fell less than one percent to $35.01 on
Wednesday, compared with a 1.69 percent decline in the S&P