CFTC Sues U.S. Bank For Aiding 'Midwest Madoff' Ponzi Scheme

United States securities regulators launched a lawsuit against a well-known financial behemoth, alleging it allowed an Iowa man dubbed the 'Midwest Madoff' to knowingly misappropriate investor funds as he masterminded a $215 million Ponzi scheme.  The Commodity Futures Trading Commission ("CFTC") filed a complaint in federal court against U.S. Bank National Association ("U.S. Bank"), alleging it played an integral role in the massive Ponzi scheme perpetrated by Russell Wassendorf, Sr. through his company, Peregrine Financial Group, Inc. ("Peregrine").  The CFTC charged US. Bank with multiple violations of the Commodity Exchange Act and requested a variety of relief including court-ordered restitution, disgorgement of gains tied to the fraud, and civil monetary penalties.  

Peregrine was a renowned commodities broker whose founder, Wassendorf, was once considered an icon in the commodities industry.  However, this changed with Wassendorf's arrest in July 2012 following a failed suicide attempt outside Peregrine's headquarters.  In a suicide note he left, Wassendorf confessed to a long-running fraud, and was later indicted, pled guilty, and sentenced to fifty years in prison.  He was ordered to pay more than $215 million in restitution.  

According to the complaint, Peregrine became registered with the CFTC in August 1992, and Wassendorf soon began using U.S. Bank for Peregrine's needs as a result of his previous banking relationship with the bank.  The bank would later maintain more than 30 accounts for Wassendorf and Peregrine, including personal accounts for Wassendorf and his family, Peregrine accounts, and accounts for other Wassendorf businesses.  Over the course of this relationship, Peregrine would deposit more than $300 million of customer funds with U.S. Bank.

Wassendorf enjoyed a preferential status with U.S. Bank due to his wealth and potential as a long-term customer.  This resulted in the bank making unusual concessions to Wassendorf, including allowing him to limit access to an account, with an account number ending in 1845 (the "1845 Account") that held millions of dollars of Peregrine's customer funds, to only him.  Indeed, U.S. Bank's internal computer system carried a memo for the 1845 Account stating that

“Per Russ Wasendorf request no account balance confirmations authorized on acct”

The bank was notified that the 1845 Account was designated as a Commodity Exchange Act Customer Segregated Account, consisting of funds from two primary sources: deposits at its Cedar Falls, Iowa branch, and wire transfers from a Peregrine customer account at JP Morgan.  As a customer segregated account, the 1845 Account was subject to various rules and regulations under the Commodity Exchange Act.

However, according to the CFTC, U.S Bank frequently flouted industry rules and regulations in allowing Wassendorf to use funds from the 1845 Account for a variety of prohibited purposes - effectively allowing him to use the account as Peregrine's commercial checking account.  This included the outflow of millions of dollars to an account related to the construction of Peregrine's new headquarters, more than $5 million to an account for Wassendorf's restaurant, My Verona, and even the transfer of more than $2 million as part of Wassendorf's 2010 divorce settlement.  

The complaint singles out a female employee identified only as "Banker A" for having a close relationship with Wassendorf.  

U.S. Bank has denied responsibility, instead accusing the CFTC of attempting to deflect blame for its failure to detect Wassendorf's fraud.  

A copy of the CFTC's complaint is here.