A US federal court in Illinois authorized two lawsuits arising from the collapse of Peregrine Financial Group to proceed against U.S. Bank, N.A., rejecting requests from the bank to dismiss the proceedings. Peregrine customers brought one lawsuit, while Fintec Group, Inc., a former introducing broker to Peregrine, commenced the other. Both cases were brought as potential class action lawsuits.
Peregrine was a futures commission merchant registered with the Commodity Futures Trading Commission until July 2012 when it filed bankruptcy following the revelation that Russell Wasendorf, Sr., its principal owner and chief executive officer, had committed fraud by using customer funds for his own purposes. Initial estimates were that Peregrine customers’ cash shortfall might exceed US $200 million or more.
U.S. Bank was the principal bank where Peregrine maintained customer funds.
In the customer lawsuit, plaintiffs claimed that U.S. Bank was liable for funds misappropriated by Mr. Wasendorf that had been deposited with it by Peregrine on the basis of a number of legal theories. The court rejected plaintiffs’ claims that U.S. Bank aided and abetted Peregrine’s and Mr. Wasendorf’s own violations, on the grounds that U.S. Bank had no actual knowledge of Mr. Wasendorf’s fraud. The court also rejected a claim of negligence against U.S. Bank because the plaintiffs were not direct customers of the bank, and thus the bank had no duty of care towards them. However, the court allowed plaintiffs’ lawsuit to proceed based on their claims of U.S. Bank’s breach of fiduciary duty, fraud by omission and a violation of an Illinois law dealing with the obligations of fiduciaries.
According to the court, Peregrine established a specially designated customer segregated account at U.S. Bank. However, “[d]espite the fact that the [relevant account] was a customer segregated account, U.S. Bank employees performed numerous transactions out of the [relevant account] for non-customer purposes.” These transactions included transferring substantial funds to personal accounts of Mr. Wasendorf and his wife (including almost US $2.5 million to his wife in connection with the couple’s divorce) and over US $24 million to the account of another company owned by Mr. Wasendorf. The court claimed that Mr. Wasendorf also granted a contractual right of setoff to the Peregrine customer segregated account in connection with guaranties provided to U.S. Bank by Mr. Wasendorf and his wife for a US $6.4 million loan to build a new Peregrine headquarters building. The court claimed that these and other alleged facts are sufficient, at this time, to support plaintiffs’ action:
Although taken individually, [these facts] are not sufficient to establish bad faith, when considered together, they suffice at this state to allow Plaintiffs to move forward with their claims.
Fintec made similar factual claims in its lawsuit, as did the customers. The court dismissed the majority of Fintec’s legal theories. However, the court permitted Fintec’s lawsuit to proceed based on alleged violations of relevant federal law dealing with the bank’s obligations in connection with holding customer funds. The court reasoned that, because U.S. Bank apparently held funds in the customer segregated account that Fintec had deposited with Peregrine to guarantee the trades of its customers, Fintec’s funds were “in connection” with making futures contracts. The court found this nexus sufficient to permit Fintec to proceed on its claims that U.S. Bank violated federal law directly, as well as that it aided and abetted a federal law breach by Peregrine.
(Click here to see the article regarding the CFTC prior actions against Ms. Veraja-Snelling, the former outside Peregrine auditor, and U.S. Bank related to the collapse of Peregrine, "CFTC Sues Peregrine Financial Group External CPA: Says Her Audits Were Not Up To Professional Standards and She Missed Signs of Problems" in the August 26, 2013 edition of what is now known as Between Bridges. Click here to see the article regarding a prior settlement between the Peregrine bankruptcy trustee and JP Morgan Chase related to the bank‘s involvement with Peregrine, “Peregrine Trustee Reaches Settlement with JP Morgan Chase” in the March 31 to April 4 and April 7, 2014 edition of Bridging the Week.)