Peregrine Financial of Chicago allegedly ignored red flags and let Ponzi schemer Trevor Cook do as he pleased.
The receiver rounding up assets for the victims of Trevor Cook's Ponzi scheme filed a federal lawsuit this week seeking at least $48 million from a Chicago-based futures broker and currency dealer alleged to have facilitated the fraud.
Peregrine Financial Group's (PFG) pursuit of profit caused it to turn a blind eye to "overwhelming red flags of fraud or insolvency" in the trades Cook and his associates had executed through the firm, according to a lawsuit filed Wednesday by receiver R.J. Zayed.
Cook, who is serving 25 years in prison, admitted to bilking more than 700 investors -- mostly retirees -- out of $194 million. The deception is the second-largest known fraud in Minnesota history.
Cook or his associates placed $48.28 million in trades through PFG from mid-2005 through June 2009 and lost $30 million in the process, according to the suit. The futures trades took place on regulated exchanges. The currency trades, known in the industry as forex trades or currency swaps, occurred over the counter with the investor on one side of the transactions and PFG, acting as a commission merchant, on the other.
"Cook and his cohorts marketed the currency program using fraudulent representations that read like a laundry list of the classic hallmarks of a Ponzi scheme," the suit says. It says PFG ignored the warnings to keep Cook's business.
PFG did not respond to a request for comment.
Cook, his associates and various business entities they controlled held at least 26 accounts at PFG, the suit says. The trades placed by Cook and his cohorts made them important customers for PFG, which had about $203 million in customer equity in 2006, the suit says. In addition, one of his entities, UBS Diversified, acted as an "introducing broker" and was paid to refer investors to the firm.
PFG knew or should have known that Cook had previous regulatory sanctions over alleged dishonesty, yet it took no special steps to scrutinize his transactions, according to the lawsuit. On the contrary, PFG's dealings with Cook and his group violated the firm's own internal compliance rules as well as standard regulations for such transactions, the suit says.
For instance, the suit says, PFG essentially let Cook act as an unregistered, illegal commodity pool operator.
Cook routinely commingled funds between accounts held by different owners to cover margin calls, the suit says, "a major red flag of potential fraud or insolvency" and a violation of industry rules and practices. Legitimately separate companies that are trading their own money do not casually and repeatedly contribute funds to accounts held by others, the suit says.
"So long as PFG avoided being stuck with a financial loss from a customer who could not meet a margin call, it really did not seem to care what Cook did, or where the money came from," the suit says.
Cook tried desperately to keep PFG from contacting his investors directly, which the suit calls "an obvious, and ominous indication of fraud." But it says Cook had PFG cowed, fearful that he would take his business elsewhere.
Cook and some associates, called "Ponzi principals" in the lawsuit, repeatedly violated several laws by making false and misleading statements to investors. One example cited is a claim that one of Cook's entities had more than $4 billion in assets under management.
"Had PFG taken even minimal steps to confirm the accuracy of this extraordinary representation ... PFG would have discovered that Cook and the other Ponzi Principals were running an investment scheme," the suit says.
Ultimately, the suit says, PFG employees helped Cook create the illusion that an account had achieved a certain return. "By this point, if not before, PFG was no longer merely choosing to ignore the obvious fraud by Cook, but was actually participating in it," the suit says.
Dan Browning • 612-673-4493