Putting an end to a CFTC (The U.S. Commodity Futures Trading Commission) charge, U.S. Bancorp’s (USB) core banking unit – U.S. Bank National Association – has been ordered to pay $18 million to customers of Peregrine Financial Group, Inc. In Jun 2013, CFTC accused U.S. Bank of inappropriately handling a Peregrine customer segregated funds account by treating the account like a regular business checking account, which aided the owner of Peregrine, Russell Wasendorf, Sr., to take $215 million from clients in the period between Jun 2008 and Jul 2012.
Apart from the monetary settlement, U.S. Bank is also required to refrain from violating the Commodity Exchange Act (CEA) and the CFTC’s Regulations that restrict “any depository institution, like U.S. Bank, from holding, disposing of, or using funds that belong to customers of a Futures Commission Merchant (FCM) as though they belong to anyone other than the customers, and also prohibit the extension of credit based on such funds to anyone other than the customer.”
Background
Peregrine was based in Cedar Falls, Iowa and was one of the largest non-bank, non-clearing FCM when it collapsed in Jul 2012.
U.S. Bank served as a depository for Peregrine and held a customer segregated funds account that Wasendorf used to cheat nearly 24,000 Peregrine clients. U.S. Bank employees who were authorized to handle the customer segregated funds account did not understand that the account was a customer segregated funds account and neither had clarity about the account designation during the concerned period stated in the CFTC complaint.
U.S. Bank lacked policies, procedures or training applicable to FCM customers or customer segregated funds during that period. However, following CFTC investigation in Jul 2012, U.S. Bank undertook new policies and procedures particularly related to FCM customer segregated funds accounts.
CFTC initiated civil action against Wasendorf and Peregrine on Jul 10, 2012. After a failed suicide attempt, Wasendorf was arrested. He pled guilty, was ordered to pay more than $215 million in restitution and is currently serving a 50-year imprisonment sentence.
Wasendorf siphoned around $36 million from the US Bank customer segregated funds account to non-Peregrine customers. Per the CFTC release, U.S. Bank withdrew its account fees from the customer segregated funds account for both Peregrine and non-Peregrine accounts held at the bank on a regular basis.
Aitan Goelman, CFTC Director of Enforcement mentioned “Russell Wasendorf stole enormous sums of money that Peregrine’s customers entrusted to him. He is responsible for his crimes. However, that fact does not excuse U.S. Bank’s failure to meet its own responsibilities to safeguard Peregrine’s customer funds that it held.”
U.S. Bancorp representative Dana Ripley stated that the company is pleased with the settlement with CFTC and mentioned that the payment does not constitute fine, penalty or acceptance of wrongdoing. The bank representative said "Like PFG's customers, U.S. Bank was subject to this sophisticated fraudulent scheme masterminded by PFG's CEO.”
U.S. Bancorp currently carries a Zacks Rank #3 (Hold). Some-better ranked stocks in the finance space include Heritage Oaks Bancorp (HEOP), Mutualfirst Financial Inc. (MFSF) and Central Pacific Financial Corp. (CPF). All three stocks sport a Zacks Rank #1 (Strong Buy).
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