United States District Court, N.D. Illinois, Eastern Division
In re Peregrine Financial Group Customer Litigation
OPINION AND ORDER
SARA L. ELLIS, District Judge.
This is one of two actions pending before this Court arising from the collapse of Peregrine Financial Group ("Peregrine") in July 2012. In this case, Plaintiffs bring a putative class action against Defendants Russell R. Wasendorf, Sr., U.S. Bank, N.A. ("U.S. Bank"), and JPMorgan Chase Bank, N.A. ("JPMorgan") on behalf of Peregrine's futures account holders and customers who have not received the entirety of their funds invested with Peregrine. U.S. Bank seeks to dismiss the claims brought against it in the Second Consolidated Amended Class Action Complaint (the "Complaint"): fraud by omission (Count I); violation of the Illinois Fiduciary Obligations Act ("FOA"), 760 Ill. Comp. Stat. § 65/1 et seq. (Count II); negligence (Count III); breach of fiduciary duty (Count IV); aiding and abetting Wasendorf's fraud (Count V); aiding and abetting Peregrine's and Wasendorf's breaches of fiduciary duties (Count VI); and aiding and abetting Wasendorf's conversion of funds (Count VII). U.S. Bank's motion  is granted in part and denied in part. Although the Court finds that Plaintiffs have sufficiently alleged U.S. Bank's bad faith to overcome U.S. Bank's FOA defense and pursue their affirmative FOA claim, their aiding and abetting claims must be dismissed because the allegations do not allow the Court to infer that U.S. Bank had actual knowledge of Wasendorf's fraud. Because Plaintiffs were non-customers of U.S. Bank and thus were owed no duty of care, Plaintiffs' negligence claim is dismissed. But because Plaintiffs have alleged that a fiduciary relationship arose on account of the deposit of their funds in a customer segregated account at U.S. Bank, their fraud by omission and breach of fiduciary duty claims may proceed to discovery.
I. Peregrine and Its Relationship with U.S. Bank
Russell Wasendorf, Sr. established Peregrine in 1990 and served as its CEO. Peregrine was a futures commission merchant ("FCM") regulated by the Commodity Futures Trading Commission ("CFTC") and the National Futures Association ("NFA"). An FCM is an entity "engaged in soliciting or in accepting orders for... the purchase or sale of a commodity for future delivery, " which, "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." 7 U.S.C. § 1a(28). As an FCM, Peregrine's operations were governed by the Commodity Exchange Act ("CEA"), 7 U.S.C. § 1 et seq., and CFTC regulations. Pursuant to these rules, Peregrine was required to keep its customers' money in a separate account maintained solely for the customers' benefit. 7 U.S.C. § 6d(a)(2); 17 C.F.R. § 1.20(a). The account was to bear a name identifying it as a customer segregated account. 17 C.F.R. § 1.20(a). Although Peregrine was allowed to commingle one customer's funds with another's in a single account, it could not commingle customer funds with its operational funds or use customer funds to guarantee trades or contracts, or secure or extend the credit of anyone other than the customer. 17 C.F.R. § 1.20(c). Peregrine could hold excess funds in its customer segregated funds accounts and withdraw those excess funds for its own use, however. 17 C.F.R. § 1.23. Similar to the restrictions on an FCM's use of money in a customer segregated account, the bank where the account is held cannot use money in the account for any purpose "except to purchase, margin, guarantee, secure, transfer, adjust or settle trades, contracts, or commodity option transactions of futures customers." 17 C.F.R. § 1.20(a). The bank must sign a written acknowledgment that futures customers' funds are deposited in the account and are being held in accordance with the CEA. Id.
Headquartered in Cedar Falls, Iowa, Peregrine established a primary banking relationship there with U.S. Bank. Peregrine maintained at least two accounts at U.S. Bank continuously from the early 1990s through July 2012 and had at least four other accounts there over that time period. Among the accounts at U.S. Bank was a customer segregated account-the 1845 Account-which is the focus of this case. Wasendorf provided U.S. Bank with business beyond the Peregrine's accounts. U.S. Bank also maintained approximately ten accounts for other companies run by Wasendorf and at least six personal bank accounts for Wasendorf and his family. Additionally, U.S. Bank extended various loans to Wasendorf and his companies between 1993 and 2012.
Indeed, because of Wasendorf's presence in Cedar Falls and the perception that he was a successful businessman, U.S. Bank sought out additional business from him and provided him with personalized service. In July 2007, Timothy Raymer, a U.S. Bank vice president, met with Wasendorf to discuss moving more of Wasendorf's business to U.S. Bank, with Raymer estimating that the potential relationship would be worth between $13 and $40 million. From 2009 to 2011, U.S. Bank sought to convince Wasendorf to open a trust and custody account to hold $100 million in U.S. Treasury bills. Two U.S. Bank employees, Hope Timmerman and Douglas Boe, were assigned to Wasendorf and his accounts as relationship managers. Timmerman, an assistant relationship manager, worked in the Cedar Falls branch office, while Boe, a senior vice president, worked in U.S. Bank's Cedar Rapids branch. Both Timmerman and Boe socialized with Wasendorf and were invited to Wasendorf's birthday golfing trip to Orlando, Florida and his wedding. They worked to cultivate the relationship, holding at least quarterly conference calls or meetings with Wasendorf. The meetings often took place at Wasendorf's restaurant in Cedar Falls, My Verona, or at Wasendorf's office, and at least on one occasion, Timmerman and Boe traveled to Chicago to meet Wasendorf.
U.S. Bank also accepted the controls Wasendorf placed on account access and gave him preferential treatment. U.S. Bank followed Wasendorf's direction that all communications regarding Wasendorf's accounts, including those of Peregrine, were to be made exclusively with him. All account inquiries and balance confirmations were to be directed to Timmerman or Boe, regardless of whether the inquiry was made by an authorized signatory on one of the accounts. Even Peregrine's CFO did not have access to Peregrine's accounts at U.S. Bank. On the other hand, Timmerman performed major transactions for Wasendorf at his request without requiring him to fill out required paperwork for the transactions. For example, in June 2002, she transferred over $1 million out of the 1845 Account to a third party, did not require Wasendorf to sign the standard form used to initiate such transfers, and instead wrote "Known Customer" on the signature line. Timmerman also monitored Wasendorf's banking activity, contacting him if she noticed a pending charge that would result in an overdraft, at which time Wasendorf would often instruct her to transfer funds out of a Peregrine account, including the 1845 Account, to cover the shortfall. Finally, Timmerman provided reference letters and creditworthiness letters for Wasendorf, including whatever language was needed to meet compliance standards.
Because Timmerman was assigned to Wasendorf's accounts, she was intimately aware of their status and the overall financial picture of Wasendorf and his companies, including Peregrine. She reviewed Peregrine's statements of financial condition, income statements, 1-FR-FCMs (a form required by the CFTC), audited financial statements, and performance projections. She also reviewed CFTC monthly reports on Peregrine's adjusted net capital, net capital requirement, excess net capital, and the amount of customer funds that Peregrine had to keep in segregated accounts. Based on Timmerman's review of these documents, U.S. Bank knew Peregrine did not turn a profit in most of its years of existence, with losses in some years totaling over $4 million. Timmerman also reviewed Wasendorf's personal tax returns, financial statements, and insurance policies.
II. The 1845 Account
In June 1996, U.S. Bank executed a letter to Peregrine acknowledging that the 1845 Account was a customer segregated account governed by the CEA. U.S. Bank employees also reassured Wasendorf that they would be able to comply with the CEA with respect to Peregrine's customer funds. Bank records and other documents referred to the 1845 Account inconsistently, however. Up until around April 2001, most of the monthly statements for the 1845 Account identified it as "Peregrine Financial Group Inc. Segregated Funds Acct." Compl. ¶ 96. Around 2002, however, the name shown on the 1845 Account's monthly statements was merely "Peregrine Financial Group Inc." Id. ¶ 153. Checks for the account always identified the payor as "Peregrine Financial Group, Inc. CEA Customer Segregated Accounts, " id. ¶ 97, and deposit record booklets and deposit tickets used similar names. Peregrine and U.S. Bank's Master Repurchase Agreement, which governed the investment of Peregrine's customers' funds, identified "Peregrine Financial Group, Inc. CEA Customer Segregated Accounts" as the party to the agreement. Id. ¶ 102. Some, but not all, computer programs at U.S. Bank identified the 1845 Account as a customer segregated account. Since 2006, screenshots showing outgoing wire transfers and the online banking profile for the 1845 Account listed the name of the account merely as "Peregrine Financial Group" or "Peregrine Financial Group Inc." Id. ¶ 154. Peregrine also recognized that the 1845 Account was a customer segregated account at least in name. Checks drawn on Peregrine's house or proprietary account and deposited into the 1845 Account listed "Peregrine Financial Group Customer Seg" or Peregrine Financial Group Seg" as the payee. Id. ¶ 130. In sum, most incoming documents indicated the 1845 Account was a customer segregated account while most outgoing documents suggested it had no such restrictions.
Plaintiffs' funds were either initially deposited in the 1845 Account or deposited in a customer segregated account at JPMorgan and then transferred to the 1845 Account. Between November 2005 and March 2009, approximately $289 million was transferred from Peregrine's customer segregated accounts at JPMorgan into the 1845 Account. Peregrine also deposited checks from individual customers directly into the 1845 Account. These checks bore notations that indicated they were customer funds.
III. Transfers from the 1845 Account
Despite the fact that the 1845 Account was a customer segregated account, U.S. Bank employees performed numerous transactions that transferred money out of the 1845 Account for non-customer purposes. These transfers included large withdrawals-often exceeding $50, 000-made personally by Wasendorf, in addition to transfers to other accounts Wasendorf held at U.S. Bank in his name or those of his family members or businesses. For example, on November 15, 2005, Wasendorf withdrew $70, 000 from the 1845 Account at the counter of the Cedar Falls branch and then immediately deposited $70, 000 in a joint checking account he held at U.S. Bank with his wife. In April 2008, U.S. Bank processed a transfer of $468, 809 from the 1845 Account to fund the purchase of Wasendorf's home in Orlando, Florida. In December 2008, Wasendorf transferred $1, 660, 000 from the 1845 Account to his ...