U.S. Bank: Lawsuit in fraud scandal "without merit"

(AP) IOWA CITY, Iowa - A lawsuit claiming U.S. Bank (USB) helped Peregrine Financial Group's CEO mislead regulators about his misuse of customer funds is a meritless attempt to shift responsibility for the $200 million fraud, a senior bank official said Tuesday.

Russ Wasendorf Sr., 64, pleaded guilty Monday to mail fraud, embezzling customer funds and lying to regulators in the 20-year scheme at the Cedar Falls-based brokerage.

U.S. Bank Senior Vice President Tom Joyce said a lawsuit filed by Peregrine President Russ Wasendorf Jr. is "entirely without merit" and that no bank employees committed misconduct in their dealings with Wasendorf Sr.

Peregrine CEO to stay in jail
CEO pleads guilty to 20-year, $200 million fraud
Peregrine CEO due in U.S. District Court over alleged fraud

"The lawsuit is an outrageous attempt by the Wasendorfs to deflect the blame and the financial obligations from the collapse of Peregrine caused by Mr. Wasendorf Sr.'s criminal activity and the failure of their own management and internal controls," Joyce said in a statement. "We will be vigorously defending the claim and believe that it is so lacking in merit that the Wasendorfs or their counsel will be responsible for our attorneys' fees."

The lawsuit, filed in Waterloo last week, is an attempt by Wasendorf Jr. and his wife to rescind millions in business loans they guaranteed with personal assets to build Peregrine's now-empty headquarters. The lawsuit claims the agreements should be void since the bank falsely assured the couple that Peregrine's accounts were "in good order."

Nicholas Iavarone, Wasendorf Jr.'s lawyer, said he hopes the lawsuit will uncover facts that will help Peregrine's bankruptcy trustee and court-appointed receiver recover funds to compensate the 24,000 customers who lost money in the fraud.

The lawsuit claims U.S. Bank knowingly failed to comply with regulations that required it to hold Peregrine's customer funds in a separate account, and that the bank knew Wasendorf Sr. was wiring funds out of a corporate account for other uses.

U.S. Bank must explain why "month after month, year after year" it allowed Peregrine to deposit customer funds into the corporate account, Iavarone said.

In its most striking allegation, the lawsuit says the bank's liaison to PFG, Hope Timmerman, informed auditors with the National Futures Association in May 2011 that a PFG customer account was holding only $7.2 million. Three days later, someone identifying herself as Timmerman contacted the auditors after speaking with Wasendorf Sr. to say she was mistaken and faxed a document showing the account actually carried $221 million, the lawsuit claims.

The "'corrected' confirmation ... (provided) Wasendorf, Sr. with the ability to continue to perpetrate the fraudulent scheme ... for another year," the lawsuit says.

Timmerman, who still works for the bank, didn't return a message seeking comment Tuesday.

Wasendorf Sr. instructed Timmerman years ago that she must not contact other PFG employees about the account and that she was to inform him about any inquiries from regulators. When U.S. Bank contacted an employee in the PFG accounting department for a routine question, Wasendorf Sr. was irate and demanded the bank fire the employee, the lawsuit said.

In his plea agreement, Wasendorf Sr. admitted that he secretly withdrew customer funds starting in the 1990s and created fraudulent U.S. Bank statements to cover his tracks and fool regulators. The National Futures Association thought it was sending forms to U.S. Bank asking for Peregrine's account balances to be verified; instead, its auditors were sending the forms to a post office box Wasendorf opened, and he would send back phony bank documents to back up his inflated figures.

Sentencing has yet to be set.

John Roe, spokesman for the Commodity Customer Coalition, a nonprofit helping Peregrine customers recover their money, said U.S. Bank can expect to face several lawsuits connected to the fraud, but that Wasendorf Jr.'s involvement in this case is laughable.

"The thing that is ridiculous about this is the source it's coming from," Roe said. "It defies reason and logic, which tells me this is a PR stunt to say: 'See, I'm one of the good guys.'"

Wasendorf Jr., the company's chief operating officer, has denied knowledge of the fraud, and his lawyer says he is not a target of the criminal investigation.