Jurors will decide whether U.S. Bank mishandled customer funds, enabling the founder of a collapsed Iowa-based brokerage to embezzle $215 million, a judge ruled Wednesday.
U.S. District Judge Linda Reade's ruling sets up a civil trial that will dive into U.S. Bank's relationship with disgraced Peregrine Financial Group founder and CEO Russell Wasendorf, Sr. At issue is whether the bank will have to pay millions of dollars in restitution and penalties or will be vindicated of any wrongdoing related to Wasendorf's fraud.
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Wasendorf, once a prominent businessman in northeastern Iowa, is serving a 50-year prison term after he admitted in 2012 to embezzling $215.5 million from 13,000 customers over a 20-year period. He carried out the fraud by repeatedly falsifying U.S. Bank records to fool regulators into believing that Peregrine's customer account had more money than it did.
The U.S. Commodity Futures Trading Commission sued U.S. Bank last year, contending that it failed to follow rules requiring banks to segregate customer accounts. The commission contends that U.S. Bank improperly accepted customer funds as security on loans it made to Wasendorf and knowingly allowed him to transfer customer funds to pay other personal and business expenses.
U.S. Bank has said it wasn't aware of the fraud, noting that Wasendorf owed it $6 million in a loan when his company went bankrupt.
"We did not know about the Peregrine Ponzi scheme and in fact we were a victim of the same scheme," spokeswoman Teri Charest said. "We will continue to defend ourselves vigorously."
The lawsuit seeks restitution for $35.6 million in customer losses, which was the amount Wasendorf transferred out for other uses, and civil penalties.
Reade rejected both sides' requests to rule in their favor before a scheduled January trial, saying there were key factual questions that jurors should decide. She said jurors should determine if U.S. Bank had actual knowledge that Wasendorf was "committing a breach of his obligation as fiduciary," or whether the bank acted in bad faith by failing to investigate obvious indications of fraud.
While noting that U.S. Bank and Wasendorf claim the bank's employees were unaware of his crimes, Reade ruled that reasonable jurors could find otherwise, given the facts of the case.
Wasendorf repeatedly told the bank that two specific employees should handle any questions about Peregrine's balance and that all bank correspondence should be directed to him, not his subordinates. A year before his fraud was uncovered, the bank told a regulatory group, the National Futures Association, that Peregrine's customer account had $7 million; Wasendorf had told the group it had $200 million. Wasendorf told the bank that a mistake was made and demanded a copy of the confirmation form, sending in a forged copy with the "corrected" balance.
Reade rejected U.S. Bank's defense that the commission could not bring the lawsuit because it also failed to uncover Wasendorf's fraud. She said that while the commission should have monitored Wasendorf closer after a critical 1999 audit, its failure to detect the scheme "should not prevent it from enforcing potential violations."
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