Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters
Kathy is a senior business trial attorney with more than 25 years experience prosecuting and defending claims for clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases on under standard fee and alternative fee arrangements. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring an expert on fraud or Ponzi schemes.
Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors
Friday, June 7, 2013
CFTC Sues U.S. Bank for Its Role in the Peregrine Financial Ponzi Scheme
Normally a trustee or investors sue the banks for funds lost in a Ponzi scheme. Banks are accused of negligently not monitoring their accounts for fraud or, worse yet, for aiding and abetting the Ponzi scheme perpetrator’s fraud. Federal regulators like the SEC and CFTC go after the bad guys and are not generally in the business of suing the banks who held the money.
In the Peregrine Financial Group, Inc. fraudulent scheme – generally believed to be a Ponzi scheme if not just one massive embezzlement – the CFTC has just sued U.S. Bank for its role in the fraudulent scheme perpetrated by Russell Wasendorf, Sr., and Peregrine. Based in Cedar Falls, Iowa, Wasendorf defrauded 24,000 victims out of $215 million over 20 years. After his unsuccessful suicide attempt and subsequent arrest, Wasendorf pleaded guilty and was sentenced to 50 years. He was also ordered to pay full restitution.
The CFTC complaint, filed on June 5, 2013, alleges that Peregrine was a "futures commission merchant" registered with the CFTC and that Peregrine deposited more than $308 million of its customers’ funds with U.S. Bank. Under the Commodity Exchange Act, 7 U.S.C. §§ 1 et seq., and CFTC regulations, 17 C.F.R. §§ 1 et seq., neither U.S. Bank nor Peregrine was permitted to "hold, dispose of, or use" these customer funds as though they belonged to anyone other than Peregrine’s customers.
Nevertheless, the CFTC alleges, U.S. Bank held and used Peregrine’s customer funds as security on a $3 million loan to Wasendorf and his wife and to make a $6.4 million loan to Wasendorf Construction, L.L.C. The CFTC also alleged that customer funds were in an account that U.S. Bank treated as if it were Peregrine’s commercial checking account 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. It is alleged that U.S. Bank knew that these transfers were not for the benefit of Peregrine’s customers.
An intriguing aspect of the complaint alleges that "Banker A," an "Assistant Relationship Manager" who worked at a Cedar Falls branch of the Bank, handled much of Peregrine’s transactions for the Bank. The complaint does not identify Banker A by name or disclose why her identity is concealed. The CFTC alleges that Wasendorf instructed the Bank to communicate only with him, and that any communications about the Bank had to be with Banker A. In summary, the complaint alleged that, "U.S. Bank knew that Wasendorf’s mandates concerning the 1845 Account were highly unusual."
The complaint also painstakingly describes how "Banker A" and U.S. Bank knew that Peregrine’s account was a customer segregated account and that the funds in it came from customers. The complaint goes on to allege that the Bank knowingly facilitated the transfer of customer funds in violation of the commodities laws. Although it comes close, the complaint does not allege that the Bank knew of Peregrine’s fraudulent scheme.
The CFTC seeks to enjoin U.S. Bank’s unlawful practices as well as restitution, disgorgement and civil monetary penalties. It does not state that any recoveries will be distributed to Wasendorf’s victims.
U.S. Bank responded to the complaint with the following statement: "Like the CFTC, we are sympathetic to the victims of Mr. Wasendorf’s self-admitted fraud. U.S. Bank was also a victim of the same fraud – one that the CFTC failed to detect. This lawsuit is without merit and represents an inappropriate attempt to reassign blame to U.S. Bank." The Bank further noted, "Banks are not responsible for losses generated by customers who are fraudsters."
On the legal merits of the CFTC’s claims, U.S. Bank responded: "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. 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 CFTC’s complaint is here.
This is not the first effort by the CFTC to pursue a bank’s improper conduct under the commodities laws. In 2012, JPMorgan paid $20 million to settle CFTC claims over its unlawful handling of customer segregated funds at Lehman Brothers. The CFTC press release announcing this settlement is here.
It remains to be seen whether the Peregrine trustee will also pursue claims against U.S. Bank for the conduct alleged in the CFTC complaint. Given the numerous allegations of the Bank’s knowledge of various issues, a complaint for negligence, breach of fiduciary duty, or possibly aiding and abetting does not seem out of the realm of possibilities.