CFTC Sues US Bank over PFG Fraud

Better late than never. After almost a year of us (and others) saying it should happen, the CFTC has finally announced a suit against US Bank, alleging unlawful use of customer funds.  You can read the full complaint here, and it is chock full of interesting/sickening/vomit inducing items depending on how much you have personally suffered from the PFG fraud. Wasendorf Sr. claimed in his (failed) suicide note to have carried out his fraud alone, but we’ve always found it hard to believe that US Bank was completely free of responsibility.

And the CFTC pulls no punches, alleging US Bank:

…used Peregrine’s customer funds as security on loans it made to  Wasendorf and his wife Connie Wasendorf and Wasendorf Construction, L.L.C. for the purpose of constructing an office building complex [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.

The complaint also sheds a little bit of light into what was going on between Wasendorf and US Bank. For instance, the complaint refers to Banker A, an “Assistant Relationship Manager” at US Bank who was in charge of managing the relationship with PFG:

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 account ended in 1845 (the “1845 Account”). Wasendorf told U.S. Bank that all communications, including written and telephonic communications, regarding the 1845 Account should be directed to and made exclusively with him. He required that no one at U.S. Bank should speak with any Peregrine personnel (apart from his personal assistant), including senior officers of the company, regarding the 1845 Account. In order to achieve this control, U.S. Bank’s internal computer system stated that for the 1845 Account “Per Russ Wasendorf request no account balance confirmations authorized on acct” and “Any Information or Account Inquiries” had to be directed to Banker A or the Relationship Manager. U.S. Bank knew that Wasendorf’s mandates concerning the 1845 Account were highly unusual.

The gist of the case is that US Bank knew (or should have known) that the funds in this account were customer segregated funds covered by stringent regulations. If the CFTC can prove they failed to do their duty in that regard, then things might finally be looking up for former PFG customers (or at least as good as they’ve looked in a while), with the relief sought by the CFTC none other than full restitution to PFG customers:

An order requiring that Defendant, as well as any of Defendant’s successors, make full restitution to each and every Peregrine customer whose funds Defendant improperly held in the 1845 Account, pursuant to such procedure as the Court may order, plus pre-judgment interest thereon from the date of such violations, plus post-judgment interest;

US Bank will surely fight the suit… but the CFTC filing suit is a lot more promising than the pending class action suit or trustee’s efforts. For one, the CFTC has much more resources (thanks US government). Two, the CFTC’s costs won’t come out of the customer’s pocket as it would in the class action suit and with the trustee. Finally, the odds of settlement just went way up in our opinion, with the CFTC much more likely to be able to scare US Bank into a settlement. And at the end of the day, the amount of customer loss here ($215 million) is very small in the grand scheme of things for US Bank – with their revenues over $20 billion last year.

And just look at the recent wave of settlements among the large banks: HSBC’s record $1.9 billion settlement over money laundering, JP Morgan’s $546 million settlement over their role in MF Global, and even Wells Fargo’s $175 million settlement over alleged discrimination in their mortgage practices. There seems to be a new playbook for these banks which seem to be too big to jail, and it is break the law, pay a fine – keep making billions off the Fed’s easy money.

The fact of the matter is that a meaningful settlement for former PFG clients would be nothing more than a bump in the road for a bank this size (their stock was down -0.80% while financials as a whole were down -1.50% as of writing this, so it’s not like a possible legal settlement spooked US Bank investors), and the lawsuit gives them cover to do the right thing and make customers whole behind the guise of doing what’s best for corporate profits by paying a settlement instead of losing much more in a judgment.

All in all, some props are due for the CFTC today. Now if they could just follow through with a suit on that little Corzine matter…

8 comments

  1. Good for the CTFC. Now let’s extend the suit to include damages as a result of lost capital, tied to the market’s gains from July 12 until now.

  2. Just wanted to say to Attain Capital…job well done…whoever wrote this commentary is an outstanding writer…brilliant.

  3. US Bank would have a lot to gain from a PR standpoint if they just pony up now.
    G

  4. Attain,

    Thank you for all your great insight.

  5. Good job by Attain for keeping all informed out there. As a former PFG Branch Manager who talked with customers in the following days after “the event” in 2012. I know that Attain was affected by this as well.

    I am glad to see that customers have a chance with this lawsuit to be made complete and rightfully receive their money.

    It is my understanding that each bank that agrees to house a Customer Segregated Funds account must sign a Customer Segregated Funds Agreement which specifically states that the bank must hold to the Commodity Exchange Act and Commission Regulations. The fact that the account 1845 was listed as a Customer Segregated Funds account and used to fund various Wasendorf entities is deeply disturbing to me.

  6. great job indeed, attain. much appreciation for the updating news.

    however for many traders whose resources were rather slim and limited, i truly wish they would survive the ordeal until their trading acct have been restored in full.

    may that day come soon for everyone affected.

    great job again, attain.

  7. […] We often hear about the need for personal responsibility but that doesn’t ever seem to extend to the banking world. This case also has significance to the PFG case as the CFTC is suing US Bank (CFTC US Bank Complaint), which was the custodial bank to PFG during their 20-year long fraud. The complaint goes beyond charging US Bank with a lack of supervision, it claims that it improperly used customer funds. […]

  8. Hi Attain,
    Are you aware of the information listed below?

    US Bank Reaches $18M CFTC Deal For Peregrine Victims

    By Andrew Scurria
    Law360, New York (February 04, 2015, 5:03 PM ET) — U.S. Bank NA will cough up $18 million for futures customers victimized by former Peregrine Financial Group Inc. CEO Russell Wasendorf Sr.’s $215 million embezzlement, putting the Commodity Futures Trading Commission’s accusations of complicity against the bank to rest.

    U.S. District Judge Linda R. Reade signed off on a consent order entered on Wednesday between the CFTC and the bank setting out the terms of a settlement reached in mid-December.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.