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

United States District Court, N.D. Iowa, Eastern Division

November 19, 2014

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
U.S. BANK, N.A., Defendant.

ORDER

LINDA R. READE, Chief District Judge.

I. INTRODUCTION

The matters before the court are Plaintiff United States Commodity Futures Trading Commission's ("CFTC") Motion for Summary Judgment ("CFTC Motion") (docket no. 77) and Defendant U.S. Bank, N.A.'s ("U.S. Bank") Motion for Summary Judgment ("U.S. Bank Motion") (docket no. 80) (collectively, "Motions").

II. PROCEDURAL HISTORY

On June 5, 2013, CFTC filed a Complaint (docket no. 2) alleging that 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) Commission Regulation 1.20(a), codified at 17 C.F.R. § 1.20(a).[1] On April 18, 2014, U.S. Bank filed an Amended Answer (docket no. 43) denying CFTC's claims and asserting affirmative defenses.

On September 3, 2014, CFTC filed the CFTC Motion. On September 30, 2014, U.S. Bank filed U.S. Bank's Resistance (docket no. 93). On October 7, 2014, CFTC filed the CFTC Reply (docket no. 102).

On September 3, 2014, U.S. Bank filed the U.S. Bank Motion. On September 30, 2014, CFTC filed CFTC's Resistance (docket no. 94). On October 14, 2014, U.S. Bank filed U.S. Bank's Reply (docket no. 105).

The parties request oral argument, but the court finds that oral argument is unnecessary. The Motions are fully submitted and ready for decision.

III. SUBJECT MATTER JURISDICTION

The court has federal question jurisdiction over CFTC's claims against U.S. Bank, which arise under Section 4d(b) of the Act and Commission Regulation 1.20. 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. SUMMARY JUDGMENT STANDARD

Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "A dispute is genuine if the evidence is such that it could cause a reasonable jury to return a verdict for either party; a fact is material if its resolution affects the outcome of the case." Amini v. City of Minneapolis, 643 F.3d 1068, 1074 (8th Cir. 2011) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 252 (1986)). "[U]nsupported, self-serving allegations and denials are insufficient to create a genuine issue of material fact." Anuforo v. Comm'r of Internal Revenue, 614 F.3d 799, 807 (8th Cir. 2010). "To survive a motion for summary judgment, the nonmoving party must substantiate [its] allegations with sufficient probative evidence [that] would permit a finding in [its] favor based on more than mere speculation, conjecture, or fantasy." Barber v. C1 Truck Driver Training, LLC, 656 F.3d 782, 801 (8th Cir. 2011) (second alteration in original) (quoting Putman v. Unity Health Sys., 348 F.3d 732, 733-34 (8th Cir. 2003)) (internal quotation marks omitted). If there is a genuine dispute about a material fact, the court must view the record in the light most favorable to the nonmoving party and afford it all reasonable inferences. See Ricci v. DeStefano, 557 U.S. 557, 586 (2009). However, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Id. at 586 (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)) (internal quotation marks omitted).

V. FACTUAL BACKGROUND

The following factual background sets forth the uncontested material facts. Additional contested material facts are discussed in the court's legal analysis. When considering the Motions, the court viewed the evidence in the light most favorable to the nonmoving party and afforded it all reasonable inferences.

A. Parties

CFTC is "an independent federal regulatory agency charged by Congress with the administration and enforcement of the Act and the Regulations thereunder." Complaint ¶ 7; Amended Answer ¶ 7.

U.S. Bank is a nationally chartered bank with its main office located in Cincinnati, Ohio. Amended Answer ¶ 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. Id.

B. Overview of the Dispute

1. The 1845 Account

a. Opening of the 1845 Account

Russell Wasendorf, Sr.[2] incorporated Peregrine Financial Group, Inc. ("Peregrine") in 1990 and in so doing, became its CEO. Wasendorf remained its CEO at all times and always held a dominant and controlling interest in Peregrine, even though other individuals and entities at times held minor amounts of Peregrine stock. From its inception until its bankruptcy, Peregrine was a registered futures commission merchant ("FCM"). An FCM is an entity authorized to solicit and accept orders to buy or sell futures contracts or options on futures contracts, and accepts money and other assets from customers to support those orders. FCMs receive money, securities and other property from their customers to margin, guarantee or secure the customers' futures and options trades. FCMs may keep their own funds ("excess funds") in customer segregated accounts. An FCM reports both its customer funds and its excess funds daily via a daily segregation filing to the National Futures Association ("NFA"), a not-for-profit self-regulatory agency for the United States futures industry, and monthly to the CFTC. Peregrine was regulated by the CFTC and the NFA.

On August 3, 1992, Peregrine opened a business checking account, designated as "Peregrine Financial Group, Inc. Customer Segregated Account, " with Firstar Bank Cedar Falls ("Firstar"), a depository bank.[3] See Firstar Signature Card, CFTC Fact Appendix ("CFTC Fact App'x") (docket nos. 77-4 through-7) at 3; see also August 3, 1992 Acknowledgment Letter, CFTC Fact App'x at 39. The last four digits of the account initially ended in 9434, but at some point the account number was changed to the number ending in 1845 (the "1845 Account"). Wasendorf, his then-wife, Connie Wasendorf, and his son, Russell Wasendorf, Jr., were initially listed as signatories on the 1845 Account, but at some point Wasendorf became the only signatory on the 1845 Account. On the same day that Peregrine opened the 1845 Account, Firstar provided Peregrine with an acknowledgment letter. The acknowledgment letter, signed by then-Vice President of Firstar, Clifford Mortenson, stated the following:

You have opened [the 1845 Account], as well as a safekeeping account, with both designated "Peregrine Financial Group, Inc. Customer Segregated Account." You have advised us that the funds deposited... in the [1845 Account] constitute monies belonging or accruing to your futures and options customers which you are required to segregate from your own funds under the Commodity Exchange Act.... You have further advised that the securities and other property deposited in the safekeeping account above described constitute investments of the funds of your futures and options customers and securities deposited with you by those futures and options customers to margin, guarantee or secure the trades or contracts of your futures and options customers that all such securities and other property are to be segregated and kept apart from your own securities and property.
We hereby acknowledge your notice that monies, securities and other property deposited in the accounts above described are those of your futures and options customers and are being held in accordance with the provisions of the Commodity Exchange Act.... We further acknowledge that the monies, securities and property contained in such accounts shall not be subject to any right of offset or lien in our favor for or on account of any indebtedness, obligations or liabilities owing by you to us.

August 3, 1992 Acknowledgment Letter, CFTC Fact App'x at 39.[4] At some point, Wasendorf spoke with Clifford Mortenson about the "concept of segregated funds" and the requirements of the Act, but it is unclear whether this conversation took place before or after opening the 1845 Account. See Wasendorf Deposition, CFTC Fact App'x at 6-7. In the winter of 1993, Wasendorf gave Mortenson a copy of the rules and regulations pertaining to customer segregated funds and was told that Firstar could comply with such rules and regulations.

Two individuals at U.S. Bank had primary responsibility for managing U.S. Bank's relationship with Wasendorf and his businesses: Douglas Boe (Senior Vice President of Commercial Lending and Relationship Manager for the Peregrine/Wasendorf relationship, who officed in Cedar Rapids) and Hope Timmerman (Assistant Relationship Manager for the Peregrine/Wasendorf relationship, who officed in Cedar Falls).

b. Funding of the 1845 Account

During the Relevant Period-June 2008 through July 2012- customer checks were deposited into the 1845 Account at U.S. Bank, and some of these checks were paid to the order of Peregrine's customer segregated account. The back of the checks were endorsed by Peregrine with the following language:

PAY TO THE ORDER OF U.S. BANK FOR DEPOSIT ONLY PEREGRINE FINANCIAL GROUP, INC. CUSTOMER SEGREGATED ACCOUNT [1845].

See, e.g., Customer Checks, CFTC Fact App'x at 328-31. Money was also deposited into the 1845 Account through wire transfers from customers, wire transfers from Peregrine's customer segregated account held at JPMorgan Chase and transfers from other Peregrine customer-related accounts at U.S. Bank. There were also deposits from non-customer related sources, including money from Wasendorf himself.

c. Wasendorf's fraud

On or about July 9, 2012, Wasendorf admitted to perpetuating a fraud accomplished by falsifying U.S. Bank records for the 1845 Account. He accomplished this fraud by opening a post office box-P.O. Box 706-in Cedar Falls, Iowa, which he set up to appear to be a Firstar, and then a U.S. Bank, address. Early on, Wasendorf created a forged bank statement that he apparently sent to the NFA and CFTC, which listed, falsely, P.O. Box 706 as Firstar's address. As a result, when the NFA or CFTC sent documents, including account balance confirmations, to Firstar or U.S. Bank, they would arrive at P.O. Box 706. Wasendorf intercepted the mail that the NFA and CFTC intended to send to U.S. Bank and, after receiving the mail, Wasendorf used Photoshop and inkjet printers to alter bank statements and return them to the NFA or CFTC. In so doing, Wasendorf was able to conceal his fraud from the NFA, CFTC, U.S. Bank employees, his family, associates and outside auditors. On July 9, 2012, sensing that his fraud was being uncovered, Wasendorf attempted suicide. He was found in his car with an apparent suicide note addressed to his wife, Nancy Paladino, and a signed statement detailing his theft of Peregrine's customers' funds and forgery of bank statements and related documents. On July 10, 2012, CFTC instituted a civil action against Wasendorf and Peregrine for injunctive relief. See CFTC v. Peregrine Fin. Grp., Inc., No. 12-CV-05383 (N.D. Ill. July 10, 2012). CFTC stated that although Wasendorf's fraud would have also merited an award of restitution, it did not seek that relief against Wasendorf because the judgment in Wasendof's criminal case had ordered him to pay restitution to defrauded investors. After initiation of the lawsuit, Peregrine immediately filed for Chapter 7 liquidation in the United States Bankruptcy Court for the Northern District of Illinois. See In re Peregrine Fin. Grp., Inc., No. 12-BK-27488 (N.D. Ill. July 10, 2012). In September 2012, Wasendorf pled guilty to embezzling $215.5 million from more than 13, 000 Peregrine customers over the course of twenty years. On January 31, 2013, he was sentenced to fifty years in federal prison by the undersigned. See Judgment, United States v. Wasendorf, No. 12-CR-2021-LRR (N.D. Iowa January 31, 2013) (docket no. 70).

d. U.S. Bank's knowledge of the nature of the 1845 Account

U.S. Bank utilizes two internal computer systems that contain account and client information, commonly referred to as the Hogan and Wizard systems. U.S. Bank began utilizing the Hogan system at the latest in 2002 and it is unclear when U.S. Bank began utilizing the Wizard system. The Hogan and Wizard systems list the 1845 Account title as "Peregrine Financial Group, Inc." and list "CEA Customer Segregated Accounts" as a related customer.

Wasendorf instructed U.S. Bank that communications, including written and telephonic communications, regarding his accounts should be directed to him. In January 2008, Wasendorf instructed U.S. Bank not to allow any balance confirmations on the 1845 Account, and in October 2009, he requested that any inquiries to U.S. Bank about the 1845 Account be directed to Boe or Timmerman. In addition, Wasendorf instructed U.S. Bank on multiple occasions that he wanted it to notify him if anyone asked any questions regarding the 1845 Account. Timmerman testified that Wasendorf, more than other clients, "seemed very persistent in that he didn't want anyone talking to anyone else but [Boe] or [her] on his accounts." Timmerman Deposition, CFTC Fact App'x at 84. Timmerman never asked Wasendorf why he was so concerned about restricting account inquiries to her and Boe.

U.S. Bank "is unaware of any U.S. Bank employee that had responsibility for the 1845 Account who understood the 1845 Account was a customer segregated funds account" during the Relevant Period. U.S. Bank's Response to Interrogatory No. 20, CFTC Fact App'x at 75. At his deposition, Boe testified as to his knowledge of customer segregated accounts as follows:

Q: Are you familiar generally with customer segregated accounts?
A: I have no idea what that means. Until-Until all this stuff went down, I had no idea what that meant.
Q: What's your present understanding of what a customer segregated account is?
....
A: I truly do not know what it means to have a segregated account. I did not believe I had one, so I'm not aware of the policies, procedures, and rules that would govern such an account.
Q: What about the definition? I mean what's your understanding as to-Do you have any understanding as to what customer segregated account means?
A: No.
Q: Do you know if you've ever had a client that had a customer segregated account?
A: No.

Boe Deposition, CFTC Fact App'x at 79. At her deposition, Timmerman testified as follows:

Q: Peregrine Financial Group, Inc., and that's the account ending in 1845. Do you know the purpose of that account?
A: No.
Q: And the source of the funds that went into that account?
A: No.
Q: And that was a business checking account?
A: Business commercial checking account.

Timmerman Deposition, CFTC Fact App'x at 86.

No U.S. Bank employee ever considered whether the 1845 Account contained excess funds from Peregrine prior to July 9, 2012, and neither Timmermann nor Boe were familiar with the concept of excess funds during the Relevant Period.

Until after Wasendorf's suicide attempt in July 2012, U.S. Bank had no policies, procedures or training specifically applicable to FCM customers or customer segregated funds. Aside from Peregrine, U.S. Bank had at least eight other FCM customers during the Relevant Period. U.S. Bank implemented new policies relating to FCM clients after July 2012.

2. U.S. Bank's knowledge of Wasendorf

a. Other accounts

Peregrine had four other accounts and Wasendorf had several other accounts at U.S. Bank. On April 24, 1990, Peregrine opened an account ending in 7467 (the "7467 Account, " or "house account") with Cedar Falls Trust & Savings Bank ("Cedar Falls T&S"). Cedar Falls T&S eventually became U.S. Bank. The 7467 Account was not a customer segregated funds account and was sometimes referred to by U.S. Bank employees as the "house account." A "house account" is an account of an FCM that does not contain customer funds. Peregrine also had a second customer segregated funds account ending in 8590 (the "8590 Account") at U.S. Bank that was subject to the Act and Regulations. Unlike the 1845 Account, which was categorized by the bank as a commercial checking account, the 8590 Account was categorized as a "custody account." August 1, 2012 Letter from Peter Carter, CFTC Fact App'x at 402. Also unlike the 1845 Account, the 8590 Account was unfunded. In addition, Peregrine had a 30.7 Secured Account, ending in 0394 (the "30.7 Secured Account) and a Foreign Exchange Account, ending in 3366 (the "Foreign Exchange Account"). See id. at 400-01.

Although Wasendorf conducted a fair amount of business at U.S. Bank in Cedar Falls, he led U.S. Bank employees to believe that the majority of Peregrine's banking was done at larger banks. In fact, in addition to the 1845 Account, Peregrine maintained multiple other customer segregated accounts at multiple financial institutions worldwide.

Wasendorf owned several entities that had accounts at U.S. Bank, including Wasendorf & Associates, Inc. aka Mountain Town, Inc.; The Peregrine Charities; Wasendorf Air, L.L.C.; My Verona, L.L.C.; Wasendorf Construction, L.L.C.; Trader Press, Inc.; Best Kids, L.L.C.; Lit Subsidized Funds; Portfolio Advisor Promotion, Inc. d/b/a Village Gate Communications; and Wasendorf & Sons Company, Inc. Id. at 400-02.

Finally, Wasendorf and his family owned several accounts at U.S. Bank. Altogether, Wasendorf, his family and his businesses held twenty-four accounts that were designated as checking accounts, four accounts that were designated as savings accounts, two accounts designated as being from a commercial loan, two accounts designated as being from a mortgage loan, one account designated as being from an installment loan, one account designated as a safe box, one account designated as a reserve line and one account designated as a custody account. See id. In the period after 2001, these accounts became subject to "know your customer" procedures and, when opened, anti-money laundering procedures. Lisa Rolinger Deposition, CFTC Material Fact App'x at 407.

b. Finances and relationship

Wasdendorf had cultivated a reputation as a civic leader in the Cedar Falls community and a leader in the commodities industry, and U.S. Bank was aware of that reputation. Wasendorf took affirmative steps to "create an impression that [he was] a legitimate businessman" so that employees of U.S. Bank would view him as "honest and successful." Wasendorf Deposition, U.S. Bank's Summary Judgment Appendix ("U.S. Bank Summary Judgment App'x") (docket nos. 80-3 through-5) at 281-82, 285-87. Wasendorf testified that he "probably gave [Timmerman] [his personal financial statement] every year since 2000, 2001, something like that." Wasendorf Deposition, CFTC Fact App'x at 571.

U.S. Bank was aware of Wasendorf's divorce from Connie Wasendorf in 2010 and discussed its impact on his finances with Wasendorf. U.S. Bank employees dined at Wasendorf's restaurants, My Verona, L.L.C. and Harvest on Huron, donated to The Peregrine Charities and were invited to Wasendorf's wedding to Nancy Paladino in June 2012. U.S. Bank viewed Wasendorf as a successful and desirable customer and U.S. Bank sought opportunities to expand its business with him and his businesses.

3. Loans

Peregrine guaranteed two loans that U.S. Bank issued to Wasendorf, Connie Wasendorf and Wasendorf's companies: (1) a $6.4 million loan ("Construction Loan") to Wasendorf Construction, L.L.C. ("Wasendorf Construction"); and (2) a $3 million loan ("Wasendorf Loan") (collectively, "Loans") to Wasendorf and Connie Wasendorf.

Wasendorf Construction was a real estate holding company owned by Wasendorf and his son, Russell Wasendorf, Jr. The purpose of the Loans was to build an office building in Cedar Falls to house Peregrine as the primary tenant.

Prior to Peregrine's bankruptcy, no U.S. Bank employee responsible for the Loans understood that the 1845 Account was a customer segregated funds account or reviewed the acknowledgment letters U.S. Bank provided to Peregrine. These acknowledgment letters stated that the 1845 Account held futures and options customer funds which Peregrine was required to segregated under the Act and that U.S. Bank could not subject the 1845 Account to any right of offset or lien.

a. Credit-approval process

U.S. Bank uses an internal system called the CAPE system as part of its loan approval process. The CAPE system is used to generate a set of documents called a Standard Credit Display ("SCD") that U.S. Bank uses to review and approve loan requests. SCDs are comprised of qualitative and quantitative information about the potential borrower and other parties critical to the credit decision, including a summary of the banking relationship between U.S. Bank and the parties involved; a summary of the strengths, weaknesses, key risks and risk mitigation factors associated with the credit decision; a financial analysis of the borrower and other critical parties; and collateral depictions. The SCDs contain all the information necessary for senior credit officers at U.S. Bank to approve loan requests. An Assistant Relationship Manager typically authors the SCD that other U.S. Bank employees use in determining whether to approve loans. The SCD then is approved by a Relationship Manager and, subsequently, depending on the total loan exposure and the risk rating, by higher-level U.S. Bank employees. The extension of credit and funding of the loan takes place after loan documents are executed by the borrower and other parties as per the approval terms and conditions.

b September 4, 2008 SCD

In August 2007, Timmerman authored an SCD for the Loans. In preparing the SCD, Timmerman requested and received Wasendorf's and Connie Wasendorf's personal financial statements and tax returns, Peregrine's financial statements, Wasendorf Construction's financial statements, CFTC Form 1-FRs[5] and other information relevant to U.S. Bank's decision to issue a loan. Timmerman then entered the relevant information from these documents into the SCD. On September 4, 2008, U.S. Bank approved Wasendorf Construction's request for a $6.4 million loan and the Wasendorfs' request for a $3 million loan. Timmerman; Kelly Lind, Vice President of Commercial Real Estate; Boe; Jeff Lara; and Richard "Dick" Edwards, the final and most senior employee, are listed as approving the Loans. See September 4, 2008 SCD, CFTC Fact App'x at 445-46. After the Loans were approved, the SCD was provided to outside counsel, who drafted the loan documents and the 2008 Guaranty.

c. 2008 Guaranty-Wasendorf Loan

On approximately September 9, 2008, Peregrine executed a Continuing Guaranty (Unlimited) (the "2008 Guaranty") for the Wasendorf Loan. U.S. Bank requested the 2008 Guaranty and knew that Peregrine was the repayment source for both the Wasendorf Loan and the Construction Loan; the excess cash flow from the rental payments made by Peregrine, who would be the primary tenant in Wasendorf Construction's new office building, to Wasendorf Construction would be used to repay the Loans. The 2008 Guaranty stated, in pertinent part:

Collateral; Setoff. [Peregrine] grants to [U.S. Bank] a security interest in all property in which [Peregrine] has an ownership interest which is now or in the future in possession of [U.S. Bank] to secure payment under this Guaranty. [Peregrine] hereby authorizes [U.S. Bank], without further notice to anyone, to charge any account of [Peregrine] for the amount of any and all Obligations due under this Guaranty, and grants [U.S. Bank] a contractual right to set off (without notice or demand) amounts due hereunder against all depository account balances, cash and other property now or hereafter in the possession of [U.S. Bank] and the right to refuse to allow withdrawals from any account (collectively "Setoff").

2008 Guaranty, CFTC Fact App'x at 534 (emphasis omitted). The 2008 Guaranty, as well as the 2011 Guaranty discussed below, were signed by Wasendorf pursuant to Peregrine corporate resolutions that gave him the right "to pledge, assign, mortgage or otherwise grant a security interest in any or all real property, fixtures, tangible or intangible personal property, or any other assets of [Peregrine]." 2008 Corporate Resolution, U.S. Bank Summary Judgment App'x at 111; see also 2011 Corporate Resolution, U.S. Bank's Summary Judgment App'x at 114. On or about January 2010, U.S. Bank and the Wasendorfs executed a First Amendment to Term Loan Agreement and Term Note, which extended the maturity date of the Wasendorf Loan. Wasendorf also signed this amendment on behalf of Peregrine, acknowledging that it continued to guarantee the obligations of the Wasendorfs to U.S. Bank. Peregrine was a guarantor on the Wasendorf Loan from September 9, 2008 until the loan was paid off in mid-February 2010. During this period, U.S. Bank collected $30, 180.59 in interest on the Wasendorf Loan.

d. July 28, 2011 SCD

Initially, when the Loans were in the process of being approved in September 2008, Wasendorf told U.S. Bank that Peregrine was not permitted to guarantee the Construction Loan due to regulatory reasons. At some point, U.S. Bank employees came to the understanding that a regulatory interpretation had changed, enabling Peregrine to guarantee the Construction Loan. Boe then began working on a new SCD in April 2011, and on July 28, 2011, U.S. Bank approved the new SCD. This SCD improved the risk ratings of Wasendorf Construction based upon the guaranty provided by Peregrine. Edwards testified that had Peregrine been unable to provide the guaranty at that time, then "[w]e either would not have renewed the [Construction Loan] and asked him to pay it off and refinance it, or we would have carried the loan with a weaker PDR rating or asked for injections to pay the loan balance down such that it would cash flow at a ...


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