FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders U.S. Bank National Association to Pay $18 Million to Peregrine Customers
U.S. Bank held the Peregrine Financial Group, Inc. customer segregated funds account that Russell Wasendorf, Sr. used to misappropriate customer funds
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that on February 4, 2015, Chief Judge Linda R. Reade of the U.S. District Court for the Northern District of Iowa entered a Consent Order imposing a permanent injunction against U.S. Bank National Association (U.S. Bank) and ordering the bank to pay $18 million dollars to be returned to Peregrine Financial Group, Inc. (Peregrine) customers.
At the time of its failure in July 2012, Peregrine was the nation’s second largest non-bank, non-clearing Futures Commission Merchant (FCM). U.S. Bank maintains branch offices in Cedar Falls, Iowa, where Peregrine and its owner, Russell Wasendorf, Sr. (Wasendorf), were located. U.S. Bank was a depository for Peregrine and held a customer segregated funds account that Wasendorf used to defraud more than 24,000 Peregrine clients and misappropriate over $215 million of customers’ money. On July 10, 2012, the CFTC instituted a civil action against Wasendorf and Peregrine, CFTC v. Peregrine Financial Group, Inc. and Russell Wasendorf, Sr., 12-cv-05383 (N.D.IL July 10, 2012) (see CFTC Press Release and CFTC Complaint 6300-12). Wasendorf was also criminally charged, pled guilty, and on January 23, 2013 was sentenced to 50 years in prison and ordered to pay more than $215 million in restitution. U.S. v. Russell Wasendorf, Sr., 12-cr-2021(N.D.IA).
During the relevant period of the CFTC’s action, June 2008 through July 2012, Wasendorf withdrew and transferred approximately $36 million from the US Bank customer segregated funds account to persons and entities that were not Peregrine customers and U.S. Bank regularly withdrew its account fees from the customer segregated funds account for both Peregrine and non-Peregrine accounts held at the bank.
The Order enjoins U.S. Bank from committing future violations of the Commodity Exchange Act (CEA) and the CFTC’s Regulations that prohibit any depository institution, like U.S. Bank, from holding, disposing of, or using funds that belong to customers of an FCM as though they belong to anyone other than the customers, and also prohibit the extension of credit based on such funds to anyone other than the customers.
The Order also requires U.S. Bank to pay $18 million to the court-appointed Trustee for Peregrine in In re Peregrine Financial Group, Inc., BK Case No. 12-27488 (N.D.IL) that will be returned to Peregrine customers that held domestic futures accounts.
CFTC Director of Enforcement Aitan Goelman stated: “Russell Wasendorf stole enormous sums of money that Peregrine’s customers entrusted to him. He is responsible for his crimes. However, that fact does not excuse U.S. Bank’s failure to meet its own responsibilities to safeguard Peregrine’s customer funds that it held. As this litigation and its resolution demonstrate, the CFTC will be relentless in pursuing recovery on behalf of innocent investors.”
The court’s Order arises from a Complaint filed by the CFTC on June 5, 2013 charging U.S. Bank with improperly holding and using a Peregrine customer segregated funds account by treating the account like a regular business checking account, thereby allowing Wasendorf to withdraw customer money for non-customer purposes from June 2008 through July 2012 (see CFTC Press Release and Complaint 6601-13, June 5, 2013).
In the Order, the parties adopt the undisputed facts from the court’s November 19, 2014 Summary Judgment Order (see Order under Related Links). There the court found that on August 3, 1992, Peregrine opened an account at a predecessor to U.S. Bank and designated the account a “Peregrine Financial Group, Inc. Customer Segregated Account.” U.S. Bank provided two letters to Peregrine acknowledging the account contained customer money, would be properly segregated, and maintained in accordance with the CEA. However, during the relevant period alleged in the CFTC Complaint, no U.S. Bank employee that had responsibility for the customer segregated funds account understood that the account was a customer segregated funds account or understood the meaning of that account designation. At that time, U.S. Bank had no policies, procedures or training specifically applicable to FCM customers or customer segregated funds. During the relevant period, Wasendorf withdrew approximately $36 million to persons and entities that were not Peregrine customers and U.S. Bank regularly withdrew its account fees from the customer segregated funds account for both Peregrine and non-Peregrine accounts held at the bank.
After the CFTC initiated its investigation in July 2012, U.S. Bank implemented new policies and procedures specifically applicable to FCM customer segregated funds accounts.
CFTC Division of Enforcement staff members responsible for this action are Robert Howell, Susan Gradman, Joy McCormack, Stephanie Reinhart, Ashley Burden, Jennifer Diamond, Jon Kramer, Elizabeth Pendleton, Scott Williamson, and Rosemary Hollinger.
A PUBLICATION OF RANDOM U.S.GOVERNMENT PRESS RELEASES AND ARTICLES
Showing posts with label ACCOUNT FEES. Show all posts
Showing posts with label ACCOUNT FEES. Show all posts
Friday, February 6, 2015
Tuesday, September 16, 2014
SEC CHARGES HEDGE FUND MANAGER AND FIRM WITH CHARGING EXCESS RESEARCH EXPENSES AND FEES
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Minneapolis-Based Hedge Fund Manager with Bilking Investors and Portfolio Pumping
The Securities and Exchange Commission charged a Minneapolis-based hedge fund manager, his investment advisory firm, and an accomplice with bilking investors in two hedge funds out of more than $1 million under the guise of research expenses and fees.
The SEC alleges that as the management fees earned by Archer Advisors LLC were shrinking due to the funds' worsening performance, the firm's owner Steven R. Markusen and an employee Jay C. Cope implemented a scheme to enrich themselves at the expense of investors in the funds. Markusen routinely caused the funds to reimburse Archer for fake research expenses, and he eventually routed much of that money to his personal checking account and spent it on country club dues, boarding school tuition, and a Lexus among other luxury items. Furthermore, Markusen devised a way to essentially charge fund investors twice for the same fake research expenses. First, he billed the funds directly by falsely claiming that Archer had paid Cope to conduct "research" for the funds. Second, he and Cope improperly diverted soft dollars from the funds to Cope for the same purported "research" and under the additional pretense that Cope was an independent consultant. Soft dollars were supposed to be used to buy third-party investment research that benefited the funds. Cope conducted no third-party research as an Archer officer whose main duties were placing trades and helping Markusen find new investors.
The SEC's complaint filed in federal court in Minneapolis also charges Markusen and Cope with conducting a separate scheme to manipulate the stock price of the funds' largest holding in order to inflate the monthly returns reported to investors and conceal the true extent of the funds' mounting investment losses.
According to the SEC's complaint, the scheme enabled Markusen to secretly pay Cope's salary with fund soft dollars rather than out of Archer's coffers. Markusen and Cope disguised Cope's $10,000 monthly salary payments as research fees because under the governing documents of the hedge funds they managed and SEC rules, Archer employees could not draw a salary from fund assets or receive fund soft dollars for non-research assistance. The SEC alleges that Markusen and Cope traded excessively in the funds' brokerage accounts in order to generate enough soft dollars to pay Cope's monthly salary at Archer. They misrepresented Cope's relationship with Archer to the brokerage firms that administered the funds' soft dollars, and created false and misleading monthly "research" invoices for the amount of Cope's salary. Markusen and Cope sent the invoices each month to the funds' brokerage firms, who in turn paid fund soft dollars directly to Cope for the purported research expenses. Markusen would then receive a $1,000 monthly kickback from Cope.
According to the SEC's complaint, Markusen and Cope carried out their portfolio pumping scheme by manipulating the price of the thinly-traded stock of CyberOptics Corp. (CYBE), which comprised over 75 percent of the funds' portfolios and was by far the largest holding. Knowing that Archer's trading as CYBE's largest shareholder could materially impact the market price, Markusen and Cope "marked the close" in CYBE on the last trading day of the month at least 28 times. In doing so, they sought to improperly drive up CYBE's closing price by placing multiple buy orders often seconds before the market closed to artificially pump up the value of the funds' portfolios, which were valued as of the close of trading on the month's last trading day. Those valuations were used to calculate the funds' monthly returns that Archer reported to investors as well as Archer's monthly management fee, which was a fixed percentage of each portfolio's value. The higher CYBE closing price at the end of each month enabled Markusen to inflate the funds' performance and extract more lucrative management fees.
The SEC's complaint charges Archer, Markusen, and Cope with violating the antifraud provisions of the federal securities laws and certain reporting provisions.
The SEC's investigation was conducted by Nicholas Eichenseer, Luz Aguilar, and Paul Montoya of the Chicago Regional Office, with assistance from Kevin Vincent and Lorraine Ricci of the Office's examination program. The SEC's litigation will be led by John Birkenheier. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.
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