Federal authorities have sued U.S. Bancorp over its handling of customer accounts for Peregrine Financial Group Inc., whose former CEO is serving a 50-year prison sentence for duping his investors in a $200 million fraud scheme.
The Minneapolis-based bank broke the law when it facilitated the use of Peregrine's customer funds held at the bank for purposes that weren't for the benefit of Peregrine's customers, according to the complaint fled Wednesday by the U.S. Commodity Futures Trading Commission.
U.S. Bank issued a statement saying it did nothing wrong and that the lawsuit has no merit.
According to the CFTC, U.S. Bank considered Peregrine's customer funds when it guaranteed a $6.4 million loan for building Peregrine's multiÂmillion headquarters in Cedar Falls, Iowa, and it also used the funds to guarantee a $3 million loan to Peregrine CEO Russell Wasendorf Sr. and his wife.
The bank also allowed Wasendorf to transfer Peregrine's customer funds to finance his other business ventures and personal matters, according to the complaint. This included more than $5 million for Wasendorf's restaurant My Verona, more than $2.5 million for a personal investment in Romania, $2.4 million for his divorce settlement and $1.1 million to a holding company for Wasendorf's private airplane.
The CFTC's director of enforcement, David Meister, said in a news release that the bank failed in its duty to protect customer funds.
"Wasendorf stole vast sums of customer money, but his crimes do not excuse U.S. Bank from its own independent responsibilities," Meister said in the statement.
U.S. Bank spokesman Tom Joyce said the bank was not notified it was holding "consumer segregated" funds.
"The lawsuit itself accuses the bank of violating technical regulations that have never been interpreted by any court to apply when a bank is not notified that it was holding customer segregated funds," Joyce said. "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."
The bank was a victim too, he said.
"Wasendorf's scheme to keep the bank in the dark included creating a P.O. box to intercept communications from the regulator to the bank," Joyce said. "As he has admitted, Wasendorf actively deceived the bank. At no time did we have any knowledge that Wasendorf was running a fraudulent scheme."
According to the complaint, U.S. Bank maintained more than 30 accounts for people and entities affiliated with Wasendorf and Peregrine and it knew that Peregrine's main customer account, the 1845 Account, was a customer segregated account under the Commodity Exchange Act. It was titled as a "Customer Segregated Funds" account in bank records.
The bank gave Wasendorf unusual control over the account, CFTC attorneys allege in the lawsuit, abiding by his directions that all communications about the account should go only through him. The bank's internal computer system contained a note saying any inquiries should be directed to a particular banker at U.S. Bank, identified only as "Banker A," or the relationship manager.
"U.S. Bank knew that Wasendorf's mandates concerning the 1845 Account were highly unusual," the complaint reads.
Peregrine collapsed in 2012 when Wasendorf's fraud was uncovered. Wasendorf tried to commit suicide in his car last year in Peregrine's parking lot, and in his suicide note he admitted to siphoning off funds and routinely forging bank documents in a scheme that began two decades earlier.
"I was able to conceal my crime of forgery by being the sole individual with access to the U.S. Bank accounts held by PFG," he wrote in the note.
Wasendorf pleaded guilty in September to embezzlement, mail fraud and lying to regulators. He is serving a 50-year prison sentence and was ordered to pay $215 million in restitution.
Jennifer Bjorhus • 612-673-4683
