The U.S. Commodities Futures Trading Commission’s (CFTC) lawsuit on U.S. Bank National Association – a unit of U.S. Bancorp (USB) – had made it quite evident that the futures and option markets regulator was not letting the bank go off the hook easily. Now, the U.S. District Judge’s decision to slap a $36 million fine left the bank with no other alternative.
U.S. Bancorp has been facing CTFC’s wrath over allegations that it intentionally allowed Russell Wasendorf – the founder of Peregrine Financial Group – to use customers’ money deposited at the bank for his personal interests leading to a $215 million fraud.
The bank argued that reimbursement must be taken from the main culprit Wasendorf. However, CTFC turned a deaf ear to the bank’s appeal, finding it equally guilty in the whole case. Further, the bank also counter attacked CTFC in its court filings, claiming the latter was consciously involved in the fraud, by pointing at its negligence in detecting the scam.
However, the District Judge has now refuted these claims against CTFC by stating that despite CFTC’s failure to discover the deceit in the 1999 audit, it has every right to follow an enforcement action.
The bank seems to disagree with the court’s verdict as it views itself as a victim and not an accomplice. It also plans to further defend itself. However, with the judgment being more inclined towards CTFC, the bank will find it difficult to put up a solid defense when the case goes for trial early next year.
Recalling the Peregrine Fraud Case
Last year, the fraud concerning Peregrine came to the forefront and shook the entire futures industry, which was already reeling under the impact of the collapse of MF Global in late 2011.
CFTC accused U.S. Bank of knowingly allowing Wasendorf to limit both access and information about an account holding millions of dollars of Peregrine's customer finances to himself. This, according to CTFC, helped Wasendorf in keeping the scam under wraps for a long time.
In Feb 2013, Wasendorf began serving his 50-year imprisonment sentence after pleading guilty to duping thousands of customers of $215 million. Following this, CTFC shifted its focus on U.S. Bank National Association and sued it to obtain further justice for the cheated customers.
Our Take
Litigation overhangs have become a common problem for major U.S. banks since the financial meltdown. These lawsuits tarnish the companies’ reputation and also impact the financials over time. However, investors and other financial institutions, who have suffered as a result of the faulty practices, should be duly compensated.
Recently, CTFC was involved in the regulatory investigations against JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Bank of America Corporation (BAC) and three other global banks concerning manipulation of foreign exchange rates. Out of the total fine of $4.3 billion, CTFC charged $1.48 billion on these banks as settlement.
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