U.S. Bank Sued Over Peregrine Role
WASHINGTON—U.S. regulators on Wednesday sued a unit of U.S. Bancorp USB -0.08% for allegedly facilitating the embezzlement of customer funds by the jailed founder of Peregrine Financial Group Inc., the collapsed futures brokerage.
The civil charges filed Wednesday by the Commodity Futures Trading Commission against U.S. Bancorp's U.S. Bank unit revolve around the bank's oversight of accounts used by Peregrine founder and Chief Executive Russell Wasendorf Sr. to siphon client funds from the firm over a period of almost 20 years.
The CFTC alleged that U.S. Bank "knowingly allowed and facilitated" Mr. Wasendorf's transfers of millions of dollars of customer funds out of the account to pay for his private jet, his restaurant and divorce settlement, according to the complaint filed in U.S. District Court for the Northern District of Iowa. Customer funds also were used as collateral on loans to fund Peregrine's $20 million headquarters building in Cedar Falls, Iowa, according to the complaint.
SO AS FAR AS USBANK CLAIMING ITSELF AS A VICTIM, TELL IT TO THE CHOIR.
Mr. Wasendorf in February began serving a 50-year federal prison sentence after pleading guilty to charges that he stole $215 million from clients.
The complaint doesn't accuse U.S. Bank of direct knowledge of the fraud, but alleges the bank indirectly aided Mr. Wasendorf's misuse of funds by failing to protect customer money.
"The CFTC is saying here that if you hold customer accounts and you see money going to third parties or individuals, you better ask some questions because it very likely is indicating that those customer funds are being misused," said Gary DeWaal, principal of his own consulting firm and a former CFTC enforcement attorney.
The CFTC has stepped up its pursuit of cases involving customer funds amid criticism that it failed to adequately oversee protection of such money in cases such as MF Global Holdings Ltd., whose 2011 failure unveiled a roughly $1.6 billion shortfall in customer funds.
In April 2012, J.P. Morgan Chase JPM -0.76% & Co. agreed to pay $20 million, the largest settlement in a customer-fund protection case, to settle CFTC charges that it counted money that belonged to customers of Lehman Brothers Holdings Inc. as though it belonged to the firm. J.P. Morgan didn't admit or deny wrongdoing.
The CFTC complaint details a long and close relationship between U.S. Bank and Mr. Wasendorf, one that the CFTC says enabled him to hide movements of millions of dollars of customer funds and model his forgeries on documents prepared by a local banker in the Cedar Falls branch to create fraudulent bank statements. The agency alleges U.S. Bank treated the accounts as Peregrine's commercial checking account, and knew that Mr. Wasendorf was misusing the funds, according to the complaint.
At Mr. Wasendorf's request, any information or account inquiries had to be directed to the local banker, referred to in the complaint as "Banker A." The CFTC said U.S. Bank "knew that Wasendorf's mandates" concerning the account "were highly unusual" and alleges that bank personnel, including Banker A, "believed it was important to maintain Wasendorf's and Peregrine's goodwill in order to protect the bank's relationship with them," the complaint states.
Hope Timmerman, a banker in the Cedar Falls branch, has been identified in earlier court documents as the person who handled the Peregrine accounts. Ms. Timmerman still works for the bank and a spokesman said that an internal investigation found no employee misconduct.
Ms. Timmerman didn't respond to requests for comment.
The agency is seeking monetary penalties, among other relief. The trustee liquidating the firm also is weighing potential claims against U.S. Bancorp and J.P. Morgan. Both banks held customer accounts, the complaint said. J.P. Morgan declined to comment.
Mr. Wasendorf said in a confession found after his suicide attempt last July that he used basic computer software to make "very convincing forgeries" of statements on its account at U.S. Bank, and earlier bank accounts, as well as forgeries of official correspondence from the bank.
Auditors routinely attempt to verify bank balances by sending confirmation forms directly to the banks. To thwart the auditors, Mr. Wasendorf supplied them with a false address for sending the forms to the bank—P.O. Box 706 in a Cedar Falls post office, which Mr. Wasendorf controlled, he said in his confession.
Mr. Wasendorf said in his confession he kept others inside Peregrine from learning about the real bank balances by insisting on being the only one authorized to open mail from the bank.
U.S. Bancorp said it was duped by Mr. Wasendorf, who intercepted regulatory communications that were intended for the bank. "As he has admitted, Wasendorf actively deceived the bank," the bank said in a statement. "Banks are not responsible for losses generated by customers who are fraudsters."
"Wasendorf stole vast sums of customer money, but his crimes do not excuse U.S. Bank from its own independent responsibilities," David Meister, the CFTC's director of enforcement, said in a statement.
—Matthias Rieker contributed to this article.