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Fintec Group, Inc. v. U.S. Bank, N.A.

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

September 25, 2014

FINTEC GROUP, INC., individually and on behalf of all others similarly situated, Plaintiff,
U.S. BANK, N.A., Defendant.


SARA L. ELLIS, District Judge.

This is one of several actions, and one of two pending in this Court, arising from the collapse of Peregrine Financial Group ("Peregrine") in July 2012.[1] This putative class action is brought by Fintec Group, Inc. ("Fintec") on behalf of introducing brokers who placed contracts of sale of commodities or deposited security deposits with Peregrine and have not received commissions that are due and payable to them and/or have not received return of their security deposits from Peregrine. Fintec seeks recovery not from Peregrine or Russell R. Wasendorf, Sr., Peregrine's CEO, but rather from U.S. Bank, N.A. ("U.S. Bank"), where Peregrine maintained a customer segregated account from which Fintec alleges Wasendorf misappropriated customer funds for his own purposes. U.S. Bank seeks dismissal of all the claims brought against it in Fintec's First Amended Class Action Complaint (the "Complaint"): aiding and abetting violations of the Commodity Exchange Act ("CEA") (Count I); violation of the CEA (Count II); aiding and abetting fraud (Count III); aiding and abetting conversion (Count IV); and negligence (Count V). U.S. Bank's motion to dismiss [41] is granted in part and denied in part. Fintec has standing to pursue claims based on the alleged inclusion of its security deposit in the customer segregated account but cannot pursue claims to recover unpaid commissions, which were general obligations of Peregrine and thus not subject to the same protections. Because Fintec was not a U.S. Bank customer, the negligence claim is dismissed. Fintec also has not alleged that U.S. Bank had actual knowledge of Wasendorf's misconduct, and so the common law aiding and abetting claims are dismissed. However, Fintec may pursue its CEA claims, including the aiding and abetting claim for which Fintec need only have alleged conscious avoidance and not actual knowledge.


I. Fintec and Peregrine

Fintec is an introducing broker registered with the Commodity Futures Trading Commission ("CFTC"). Introducing brokers are those engaged in soliciting or accepting orders for the purchase or sale of commodities. They do "not accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom." 7 U.S.C. § 1a(31)(A)(i)(II).

Wasendorf established Peregrine in 1990 and was its CEO until its demise. Peregrine was a futures commission merchant ("FCM"), which, unlike an introducing broker, could accept money, securities, and property to margin, guarantee, and secure trades and contracts. As an FCM, Peregrine was regulated by the CFTC and the National Futures Association ("NFA"). 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 but 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.

Introducing brokers like Fintec work with FCMs to place orders for Fintec's customers. The arrangement between the introducing broker and the FCM is typically memorialized in a separate contract. Peregrine and Fintec entered into such an introducing broker agreement on June 4, 2009. Peregrine represented in the agreement that it was in compliance with the capital and financial reporting requirements to which it was subject, including those under the CEA. Fintec relied on Peregrine to disclose any deficiencies in its reporting requirements and to maintain compliance with those requirements. The parties' agreement made Fintec responsible for its customer obligations, with Fintec "guarantee[ing] all the financial obligations of the Customer Accounts of Customers serviced by" Fintec. Ex. A to Complaint ¶ 11.0(a). As security for its customers' orders and to ensure Fintec's compliance with its obligations under the agreement, Fintec was required to make a security deposit with Peregrine. Peregrine had the discretion to deduct amounts from the security deposit if it determined it was entitled to payment from Fintec. In compliance with its agreement, Fintec made a $50, 000 security deposit to Peregrine, which Peregrine identified as having been deposited in a "reg seg" account. Compl. ¶ 33. The security deposit could be deposited in a customer segregated account because it constituted deposits against possible future uncollectible amounts from accounts serviced by Fintec.

Pursuant to the agreement, Fintec was entitled to commissions on orders it placed through Peregrine. Peregrine was to pay these commissions to Fintec within fifteen days after the end of the month during which they were earned. But Peregrine could use any earned commissions to satisfy obligations a Fintec customer owed Peregrine. Peregrine did not pay Fintec the commissions it was due for June and the first nine days of July 2012.

II. Peregrine and U.S. Bank

Wasendorf was a well-known businessman in Cedar Falls, Iowa and a valued customer of U.S. Bank's Cedar Falls branch, where he maintained over thirty accounts for himself and entities and individuals with whom he was affiliated.[3] As required by the CEA, Peregrine deposited customer funds in a customer segregated account at U.S. Bank known as the 1845 Account. U.S. Bank provided a written acknowledgment to Peregrine that the funds deposited in that account would be maintained in strict compliance with the CEA. U.S. Bank's records and documents referred to the 1845 Account as a customer segregated account. In addition, U.S. Bank was aware of Peregrine's agreements with introducing brokers, including Fintec, and knew that Fintec's security deposit was a guarantee of the obligations of its customers.

Peregrine's and Wasendorf's other accounts at U.S. Bank, including the 1845 Account, were primarily monitored by Banker A, an Assistant Relationship Manager in the Cedar Falls branch, who personally processed outgoing wire transfers and cashier checks from the 1845 Account that were initiated by Wasendorf by phone or fax. Although U.S. Bank has account opening documents and signature cards for all other Peregrine and Wasendorf accounts maintained at U.S. Bank, it has been unable to locate any account opening documents, signature cards, or written acknowledgments for the 1845 Account. Access to the 1845 Account was limited solely to Wasendorf, in response to Wasendorf's instruction that no one at U.S. Bank should speak with any Peregrine employees, aside from Wasendorf and his personal assistant, regarding that account.

Although the 1845 Account was a customer segregated account, there were numerous large withdrawals and transfers from that account, many to other accounts at U.S. Bank affiliated with Wasendorf. Banker A was aware of the flow of funds out of the 1845 Account because U.S. Bank's procedures required verification of each outgoing transaction over $10, 000 with Wasendorf. Over $325 million flowed through this account between May 2005 and June 2012. Between June 2008 and June 2012, over $118 million was deposited into the 1845 Account, over 94% of which was customer funds. Over the same time period, over 30% of those funds were used by Wasendorf for non-customer use, such as to fund his divorce settlement, his restaurant, his personal investments in Romania, and his private airplane.

Banker A was aware of the CEA segregation requirements and calculated the amount of customer segregated funds Peregrine maintained in the 1845 Account at various times when preparing documents for loans U.S. Bank extended in 2008 to Wasendorf Construction, another business run by Wasendorf, and the Wasendorfs. Although U.S. Bank acknowledged it could not rely upon Peregrine to guarantee the Wasendorf Construction loan, it nevertheless did. Peregrine granted U.S. Bank a security interest in all Peregrine property in U.S. Bank's possession, including the 1845 Account, and granted U.S. Bank a contractual right of setoff against any account balances, cash, and other property in U.S. Bank's possession. U.S. Bank considered the 1845 Account, which had the largest balance of all of Peregrine's and Wasendorf's accounts at the time, as part of the guaranty. U.S. Bank also used the 1845 Account to guarantee loans made to Wasendorf and his then-wife on the same terms.

III. Wasendorf's Fraud

Ultimately, Wasendorf withdrew over $200 million from the 1845 Account for non-customer use. To conceal his conduct, he diverted mail intended for U.S. Bank to a post office box he rented in Cedar Falls. This meant U.S. Bank did not receive the typical balance confirmation requests for Peregrine's accounts from the NFA or Peregrine's auditor. As a result, Wasendorf was able to represent to the NFA, Peregrine's auditor, and its customers that Peregrine maintained a customer segregated account at U.S. Bank that had over $200 million when the average balance of that account since May 2005 was only approximately $15.7 million.[4] U.S. Bank did receive a balance confirmation request from the NFA for the 1845 Account in May 2011, however, which U.S. Bank truthfully completed and returned to Peregrine and the NFA. But Wasendorf learned of this and thereafter sent a replacement form indicating that there was not just over $7 million in the 1845 Account, as U.S. Bank had indicated, but rather $220 million in that account. U.S. Bank did not receive any additional balance confirmation requests from Peregrine, the NFA, or Peregrine's auditor and never followed up to determine why the May 2011 request was the only one it received. Wasendorf also filed other fraudulent forms with federal regulators and made fraudulent statements to the general public that concealed Peregrine's non-compliance with the CEA and other governing regulations.

In mid-2012, however, Wasendorf recognized that his scheme was going to collapse and his fraud would be exposed. On July 9, 2012, he attempted suicide, leaving a confession and suicide note admitting to fraud. Peregrine subsequently declared bankruptcy. Wasendorf pleaded guilty ...

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