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United States Commodity Futures Trading Commission v. U.S. Bank, N.A.

United States District Court, Eighth Circuit

January 27, 2014

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Plaintiff, 13-CV-2041-LRR
v.
U.S. BANK, N.A., Defendant.

ORDER

LINDA R. READE, Chief District Judge.

I. INTRODUCTION

The matter before the court is Plaintiff United States Commodity Futures Trading Commission's ("Commission") "Motion to Strike Defendant's First and Third Affirmative Defenses" ("Motion") (docket no. 20).

II. PROCEDURAL HISTORY

On June 5, 2013, the Commission filed a Complaint (docket no. 2) alleging that Defendant U.S. Bank, N.A. ("U.S. Bank") improperly used (Count I) and held (Count II) customer funds in violation of: (1) Section 4d(b) of the Commodity Exchange Act ("Act") (codified as amended at 7 U.S.C. § 6d(b)); and (2) 17 C.F.R. § 1.20(a). On August 5, 2013, U.S. Bank filed a "Motion to Dismiss Complaint Seeking Permanent Injunction, Civil Monetary Penalties, and Other Equitable Relief" ("Motion to Dismiss") (docket no. 10). On November 5, 2013, the court denied U.S. Bank's Motion to Dismiss. November 5, 2013 Order (docket no. 18).

On November 19, 2013, U.S. Bank filed an Answer (docket no. 19). On December 3, 2013, the Commission filed the Motion. On December 20, 2013, U.S. Bank filed a "Resistance to Plaintiff's Motion to Strike Affirmative Defenses" ("Resistance") (docket no. 21). On December 27, 2013, the Commission filed a "Reply in Support of Motion to Strike Defendant's First and Third Affirmative Defenses" ("Reply") (docket no. 24).

In the Resistance, U.S. Bank requests the opportunity to present oral argument. The court finds that oral argument is unnecessary. The Motion is fully submitted and ready for decision.

III. SUBJECT MATTER JURISDICTION

The court has federal question jurisdiction over the Commission's claims against U.S. Bank, which arise under 7 U.S.C. § 6d(b) and 17 C.F.R. § 1.20(a). See 28 U.S.C. § 1331 ("The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.").

IV. FACTUAL BACKGROUND

The Commission is "an independent federal regulatory agency charged by Congress with the administration and enforcement of the Act and the Regulations thereunder." Complaint ¶ 7.

U.S. Bank "is a nationally chartered bank with its principal place of business in Minneapolis, Minnesota." Id. ¶ 8. U.S. Bank has several branches in the Northern District of Iowa, including in Cedar Falls, Iowa. U.S. Bank is a wholly owned subsidiary of U.S. Bancorp.

A. The 1845 Account

Russell Wasendorf, Sr.[1] incorporated Peregrine Financial Group, Inc. ("Peregrine") in 1990. In January 1992, Peregrine registered as a futures commission merchant ("FCM") with the Commission. Wasendorf, who was the Chief Executive Officer of Peregrine from its inception, registered with the Commission as an associated person ("AP") of Peregrine in 1992.

An FCM is an entity "that... is... engaged in soliciting or in accepting orders for... the purchase or sale of a commodity for future delivery... [and] in connection with [such activities], accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom... or... that is registered with the Commission as a [FCM]." 7 U.S.C. § 1a(28). As an FCM, Peregrine was required to keep its customers' funds in a customer segregated account ("CSA"), which "[is] designed to ensure that customer funds are protected and available for immediate withdrawal or transfer, even if [Peregrine] experiences financial distress or enters into bankruptcy." Complaint ¶ 15.

In August 1992, Wasendorf, as Peregrine's AP, placed one of Peregrine's CSAs, the 1845 Account, [2] with a depository bank, Firstar Corporation ("Firstar"). Firstar acted as the depository for the 1845 Account until it merged with U.S. Bancorp in 2001, after which U.S. Bank acted as the depository for the 1845 Account. When U.S. Bank took control of the 1845 Account, Peregrine notified U.S. Bank that the 1845 Account was a Commodity Exchange Act CSA. In addition, bank records and related documents referred to the 1845 Account as Customer Segregated Funds or something similar.[3] While U.S. Bank was the depository of the 1845 Account, Banker A, an Assistant Relationship Manager, was the employee with primary responsibility of managing U.S. Bank's relationship with Wasendorf and Peregrine.

In the course of its business, Peregrine instructed its customers to send checks to fund CSAs to an Iowa or Illinois address. The checks that customers sent to Peregrine in Iowa were usually deposited in U.S. Bank's Cedar Falls branch and personally processed by Banker A. Such checks were labeled "Peregrine Financial Group, Inc. Customer Segregated Account." Id. ¶ 27.

Among Peregrine employees, Wasendorf made certain he alone had access to and information about the 1845 Account. In fact, Wasendorf told U.S. Bank that he alone should receive communications regarding the 1845 Account. To fulfill Wasendorf's request, U.S. Bank noted in its internal computer system that no account balance confirmations on the 1845 Account were allowed and that any inquiries about the 1845 Account had to be directed to Banker A or the Relationship Manager.

Over the course of two decades, Wasendorf defrauded over 24, 000 of Peregrine's customers by misappropriating over $215 million in customer funds from the 1845 Account. He accomplished this by renting a post office box in Cedar Falls, which he set up to appear to be a U.S. Bank address. At the post office, Wasendorf intercepted mail that the National Futures Association ("NFA")[4] and Peregrine's auditor intended to send to U.S. Bank. After receiving the mail, Wasendorf used Photoshop and inkjet printers to alter the bank statements for the 1845 Account and then sent the altered bank statements to the NFA and Peregrine's auditor. In so doing, Wasendorf was able to temporarily conceal his fraud from the NFA, Peregrine's auditor and federal regulators.

Aside from the 1845 Account, U.S. Bank maintained over thirty additional accounts with entities and individuals affiliated with Wasendorf and Peregrine. Among these accounts were accounts for Wasendorf's other companies, including: Wasendorf Air, L.L.C. (company created to hold title to Wasendorf's private airplane), Wasendorf & Associates, Inc. (research and publishing firm), My Verona, L.L.C. (Cedar Falls restaurant) and Traders Press, Inc. (publishing company).

In May 2011, U.S. Bank received a balance confirmation request from the NFA and confirmed that the 1845 Account only held $7.1 million. After returning the form to the NFA, Banker A informed Wasendorf of the confirmation form and provided Wasendorf with a copy of the form. Wasendorf then sent a falsified form to the NFA that stated that the balance of the 1845 Account was $218, 650, 550. On July 9, 2012, as federal authorities were about to discover his fraud, Wasendorf attempted suicide and left a note admitting his fraudulent behavior.

On September 14, 2012, the government filed an Information charging Wasendorf with mail fraud (Count I), embezzlement of customer funds (Count II), making false statements to the Commission (Count III) and making false statements to the NFA (Count IV). See United States v. Wasendorf, No. 12-CR-2021-LRR (N.D. Iowa Sept. 14, 2012), Information (docket no. 18). On September 17, 2012, Wasendorf pled guilty before United States Chief Magistrate Judge Jon S. Scoles to each count in the Information. See id., Minute Entry (docket no. 28). On October 3, 2012, the undersigned accepted Wasendorf's guilty plea. See id., Order (docket no. 35). On January 31, 2013, the court sentenced Wasendorf to fifty years in prison and ordered that he pay over $215 million in restitution. See id., Judgment (docket no. 70).

B. Loans to the Wasendorfs and Wasendorf Construction, L.L.C.

On September 9, 2008, U.S. Bank issued Wasendorf and his wife, Connie Wasendorf, a $3 million loan ("Wasendorfs' loan"). On that same day, Wasendorf, on Peregrine's behalf, guaranteed the Wasendorfs' loan ...


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