Bancorp sued over 'Midwest Madoff' brokerage accounts

U.S. regulators sued U.S. Bancorp on Wednesday, alleging it knowingly allowed the head of a failed Iowa brokerage, dubbed 'the Midwest Madoff,' to use customer money held at the bank to help fund a lavish lifestyle.

The case is the first from regulators to target banks used by Russell Wasendorf Sr., the former chief executive of Peregrine Financial Group (PFG), who began serving a 50-year sentence in February for bilking $215 million from customers.

The revelation of a nearly two-decade fraud last summer has dealt another blow to confidence in the futures industry after the failure of MF Global in late 2011, and drew comparisons with New York money manager Bernard Madoff's massive Ponzi scheme due to the length of his deception. Madoff is serving a 150-year prison sentence.

"(The bank) knowingly facilitated Wasendorf's transfers of millions of dollars of customers' funds out of this account to pay for Wasendorf's private jet, his restaurant, and his divorce settlement, among other things," the U.S. Commodity Futures Trading Commission (CFTC) said.

"Although the (account) was a customer segregated account containing Peregrine's customer funds, U.S. Bank and Banker A treated the account as if it were a Peregrine commercial checking account."

The lawsuit singled out a female employee, identified only as 'Banker A' and described as a 'Assistant Relationship Manager' at the bank's Cedar Falls, Iowa, branch, who had close dealings with Wasendorf. According to the suit, the bank and employees involved with the account were aware it held customer money.

"Throughout the relevant period, Banker A personally facilitated telephonic and inbranch deposits and wire transfers of Peregrine customer funds," the CFTC lawsuit said.

"Banker A and other U.S. Bank personnel perceived Wasendorf as a successful, desirable bank client with the potential to be a profitable, high growth client."

The CFTC complaint, filed in the U.S. District Court for the Northern District of Iowa, alleged U.S. Bank NA, a unit of U.S. Bancorp, accepted customer funds as security on multimillion dollar loans to Wasendorf, his wife and his construction company.

U.S. Bancorp spokesman Tom Joyce said the CFTC case was an attempt to deflect attention from the regulator's failure to uncover the decades-long fraud until Wasendorf confessed in a note left after a failed suicide attempt last summer.

"This lawsuit is without merit and represents an inappropriate attempt to reassign blame to U.S. Bank," Joyce said.

"U.S. Bank was also a victim of the same fraud - one that the CFTC failed to detect."

MISSING CUSTOMER MONEY

Some Peregrine customers, the majority of whom have received less than one-third of their money back, were critical of the CFTC after Wasendorf's fraud went undetected for nearly 20 years.

"It was the regulators who allowed all this to go on," said Joe Berger, who had $100,000 in a Peregrine account when the fraud came to light.

"Now regulators riding to my rescue at this date, I don't have a lot of confidence in them."

James Koutoulas, a lawyer and money manager, who co-founded the Commodity Customer Coalition to advocate for former MF Global and Peregrine customers offered cautious optimism.

"It's really the first ray of hope that we've seen for a while, and it's a good one," Koutoulas said of the complaint.

"If they hit a home run on the verdict, U.S. Bancorp could be on the hook for the whole shortfall," he said, describing the case against the bank as "pretty damning".

Peregrine Financial's trustee, Ira Bodenstein, is also contemplating a lawsuit against U.S. Bank to recoup customer funds. A lawyer for the trustee, Bob Fishman, said the CFTC lawsuit does not change that.

The outcome of the CFTC case could affect separate civil or class-action lawsuits, legal experts said, but they cautioned the case could take many years.

A previous attempt by regulators to sue the bank of failed brokerage Sentinel Management Group has been winding its way through the courts for more than five years.

(Additional reporting by Douwe Miedema in Washington and Ann Saphir in San Francisco; editing by John Wallace, Matthew Lewis and Jeffrey Benkoe)