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…