US Commodity Futures Trading Commission v. US Bank, NA

Filing 112

ORDER granting in part and denying in part 77 Motion for Summary Judgment: The court grants the CFTC Motion to the extent it argues that U.S. Bank may not pursue the affirmative defense of unclean hands. The court denies the CFTC Motion with resp ect to its other arguments. Granting in part and denying in part 80 Motion for Summary Judgment: The court grants the U.S. Bank Motion to the extent it argues that U.S. Bank did not improperly use the customer funds, thereby violating the Act and the Regulations, by considering them when deciding whether to issue the Loans. The court denies the U.S. Bank Motion with respect to its other arguments.. Signed by Chief Judge Linda R Reade on 11/19/14. (ksy)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF IOWA
EASTERN DIVISION
UNITED STATES COMMODITY
FUTURES TRADING COMMISSION,
Plaintiff,

No. 13-CV-2041-LRR

vs.

ORDER

U.S. BANK, N.A.,
Defendant.
____________________
TABLE OF CONTENTS
I.

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

II.

PROCEDURAL HISTORY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

III.

SUBJECT MATTER JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . 4

IV.

SUMMARY JUDGMENT STANDARD. . . . . . . . . . . . . . . . . . . . . . . . . 4

V.

FACTUAL BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
A.
B.

Parties.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Overview of the Dispute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.
The 1845 Account.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
a.
Opening of the 1845 Account. . . . . . . . . . . . . . . . . . . 6
b.
Funding of the 1845 Account. . . . . . . . . . . . . . . . . . . 8
c.
Wasendorf’s fraud. . . . . . . . . . . . . . . . . . . . . . . . . . 9
d.
U.S. Bank’s knowledge of the nature
of the 1845 Account. . . . . . . . . . . . . . . . . . . . . . . . 10
2.
U.S. Bank’s knowledge of Wasendorf.. . . . . . . . . . . . . . . . 12
a.
Other accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
b.
Finances and relationship. . . . . . . . . . . . . . . . . . . . 13
3.
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
a.
Credit-approval process. . . . . . . . . . . . . . . . . . . . . . 14
b.
September 4, 2008 SCD.. . . . . . . . . . . . . . . . . . . . . 15
c.
2008 Guaranty—Wasendorf Loan. . . . . . . . . . . . . . . 16
d.
July 28, 2011 SCD. . . . . . . . . . . . . . . . . . . . . . . . . 17
e.
2011 Guaranty—Construction Loan.. . . . . . . . . . . . . 17
f.
Peregrine references in SCDs.. . . . . . . . . . . . . . . . . 18

4.

5.
VI.

g.
U.S. Bank’s actions post-Peregrine bankruptcy. . . . . .
Transactions involving the 1845 Account.. . . . . . . . . . . . . .
a.
McCormack Declaration. . . . . . . . . . . . . . . . . . . . .
(1)
Parties’ arguments. . . . . . . . . . . . . . . . . . . .
(2)
Applicable law and application.. . . . . . . . . . . .
b.
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c.
Transfers and withdrawals.. . . . . . . . . . . . . . . . . . .
d.
Payments to U.S. Bank. . . . . . . . . . . . . . . . . . . . . .
Audits of Peregrine. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18
18
18
19
20
22
22
23
24

ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
A.
B.

C.

The Act and the Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . .
Improper Use of Customer Funds. . . . . . . . . . . . . . . . . . . . . . . .
1.
Was the 1845 Account subject to the Guaranties?. . . . . . . . .
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . .
b.
Applicable law.. . . . . . . . . . . . . . . . . . . . . . . . . . .
c.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
Is merely acquiring a right of set off unlawful,
or were any other actions by U.S. Bank in enforcing
the Guaranties unlawful?. . . . . . . . . . . . . . . . . . . . . . . . .
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . .
b.
Applicable law.. . . . . . . . . . . . . . . . . . . . . . . . . . .
c.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.
Did U.S. Bank improperly use the customer funds
in the 1845 Account to inform its decision on whether
to issue the Loans?. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . .
b.
Applicable law and application. . . . . . . . . . . . . . . . .
4.
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Improper Holding of Customer Funds. . . . . . . . . . . . . . . . . . . . .
1.
Duty.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . .
b.
Applicable law.. . . . . . . . . . . . . . . . . . . . . . . . . . .
c.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
Trust accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
a.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . .
b.
Applicable law.. . . . . . . . . . . . . . . . . . . . . . . . . . .
c.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Transfers to U.S. Bank. . . . . . . . . . . . . . . . .
(2)
Transfers to other entities. . . . . . . . . . . . . . . .
(a)
Knowledge. . . . . . . . . . . . . . . . . . . . .

25
26
27
27
27
29

31
31
31
33

34
35
35
36
36
37
37
38
39
41
41
42
47
47
51
51

D.

E.

VII.

i.
Parties’ arguments.. . . . . . . . . . .
ii.
Applicable law and application.. . .
(b)
Bad faith. . . . . . . . . . . . . . . . . . . . . .
i.
Parties’ arguments.. . . . . . . . . . .
ii.
Applicable law. . . . . . . . . . . . . .
iii.
Application.. . . . . . . . . . . . . . . .
Unclean Hands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.
Parties’ arguments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
Applicable law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.
Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.
CFTC Motion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
U.S. Bank Motion. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51
52
53
53
55
56
59
59
61
65
66
66
66

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
I. INTRODUCTION
The matters before the court are Plaintiff United States Commodity Futures Trading

Commission’s (“CFTC”) Motion for Summary Judgment (“CFTC Motion”) (docket no.
77) and Defendant U.S. Bank, N.A.’s (“U.S. Bank”) Motion for Summary Judgment
(“U.S. Bank Motion”) (docket no. 80) (collectively, “Motions”).
II. PROCEDURAL HISTORY
On June 5, 2013, CFTC filed a Complaint (docket no. 2) alleging that U.S. Bank
improperly used (Count I) and held (Count II) customer funds in violation of: (1) Section
4d(b) of the Commodity Exchange Act (“Act”), codified as amended at 7 U.S.C. § 6d(b);
and (2) Commission Regulation 1.20(a), codified at 17 C.F.R. § 1.20(a).1 On April 18,

1

After filing the Complaint, CFTC amended its regulations, codifying Commission
Regulation 1.20(a) at 17 C.F.R. § 1.20(f)(3). See 17 C.F.R. § 1.20(f)(3); see also Final
Rule, Enhancing Protections Afforded Customers and Customer Funds Held by Futures
Commission Merchants and Derivatives Clearing Organizations, 78 F.R. 68506, 68542
(Nov. 13, 2013) (“The Commission notes that the language in proposed § 1.20(f) largely
mirrors the language set forth in current § 1.20, which language was, and continues to be,
intended to further implement the segregation provisions of the Act.”). As the regulation
(continued...)
3

2014, U.S. Bank filed an Amended Answer (docket no. 43) denying CFTC’s claims and
asserting affirmative defenses.
On September 3, 2014, CFTC filed the CFTC Motion. On September 30, 2014,
U.S. Bank filed U.S. Bank’s Resistance (docket no. 93). On October 7, 2014, CFTC filed
the CFTC Reply (docket no. 102).
On September 3, 2014, U.S. Bank filed the U.S. Bank Motion. On September 30,
2014, CFTC filed CFTC’s Resistance (docket no. 94). On October 14, 2014, U.S. Bank
filed U.S. Bank’s Reply (docket no. 105).
The parties request oral argument, but the court finds that oral argument is
unnecessary. The Motions are fully submitted and ready for decision.
III. SUBJECT MATTER JURISDICTION
The court has federal question jurisdiction over CFTC’s claims against U.S. Bank,
which arise under Section 4d(b) of the Act and Commission Regulation 1.20. See 28
U.S.C. § 1331 (“The district courts shall have original jurisdiction of all civil actions
arising under the Constitution, laws, or treaties of the United States.”).
IV. SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate “if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a). “A dispute is genuine if the evidence is such that it could cause a
reasonable jury to return a verdict for either party; a fact is material if its resolution affects
the outcome of the case.” Amini v. City of Minneapolis, 643 F.3d 1068, 1074 (8th Cir.
2011) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 252 (1986)).
“[U]nsupported, self-serving allegations and denials are insufficient to create a genuine

1

(...continued)
in effect during the time of the alleged violations was codified at 17 C.F.R. § 1.20(a), the
court will refer to this section in its discussion of the case.
4

issue of material fact.” Anuforo v. Comm’r of Internal Revenue, 614 F.3d 799, 807 (8th
Cir. 2010). “To survive a motion for summary judgment, the nonmoving party must
substantiate [its] allegations with sufficient probative evidence [that] would permit a finding
in [its] favor based on more than mere speculation, conjecture, or fantasy.” Barber v. C1
Truck Driver Training, LLC, 656 F.3d 782, 801 (8th Cir. 2011) (second alteration in
original) (quoting Putman v. Unity Health Sys., 348 F.3d 732, 733-34 (8th Cir. 2003))
(internal quotation marks omitted). If there is a genuine dispute about a material fact, the
court must view the record in the light most favorable to the nonmoving party and afford
it all reasonable inferences. See Ricci v. DeStefano, 557 U.S. 557, 586 (2009). However,
“[w]here the record taken as a whole could not lead a rational trier of fact to find for the
nonmoving party, there is no genuine issue for trial.” Id. at 586 (quoting Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)) (internal quotation marks
omitted).
V. FACTUAL BACKGROUND
The following factual background sets forth the uncontested material facts.
Additional contested material facts are discussed in the court’s legal analysis. When
considering the Motions, the court viewed the evidence in the light most favorable to the
nonmoving party and afforded it all reasonable inferences.
A. Parties
CFTC is “an independent federal regulatory agency charged by Congress with the
administration and enforcement of the Act and the Regulations thereunder.” Complaint
¶ 7; Amended Answer ¶ 7.
U.S. Bank is a nationally chartered bank with its main office located in Cincinnati,
Ohio. Amended Answer ¶ 8. U.S. Bank has several branches in the Northern District of
Iowa, including in Cedar Falls, Iowa. U.S. Bank is a wholly-owned subsidiary of U.S.
Bancorp. Id.

5

B. Overview of the Dispute
1.

The 1845 Account
a.

Opening of the 1845 Account

Russell Wasendorf, Sr.2 incorporated Peregrine Financial Group, Inc. (“Peregrine”)
in 1990 and in so doing, became its CEO. Wasendorf remained its CEO at all times and
always held a dominant and controlling interest in Peregrine, even though other individuals
and entities at times held minor amounts of Peregrine stock. From its inception until its
bankruptcy, Peregrine was a registered futures commission merchant (“FCM”). An FCM
is an entity authorized to solicit and accept orders to buy or sell futures contracts or options
on futures contracts, and accepts money and other assets from customers to support those
orders. FCMs receive money, securities and other property from their customers to
margin, guarantee or secure the customers’ futures and options trades. FCMs may keep
their own funds (“excess funds”) in customer segregated accounts. An FCM reports both
its customer funds and its excess funds daily via a daily segregation filing to the National
Futures Association (“NFA”), a not-for-profit self-regulatory agency for the United States
futures industry, and monthly to the CFTC. Peregrine was regulated by the CFTC and the
NFA.
On August 3, 1992, Peregrine opened a business checking account, designated as
“Peregrine Financial Group, Inc. Customer Segregated Account,” with Firstar Bank Cedar
Falls (“Firstar”), a depository bank.3 See Firstar Signature Card, CFTC Fact Appendix
(“CFTC Fact App’x”) (docket nos. 77-4 through -7) at 3; see also August 3, 1992

2

For ease of reading, the court will refer to Russell Wasendorf, Sr. as
“Wasendorf.” The court will refer to other members of Wasendorf’s family by their full
names.
3

Firstar acted as the depository for the 1845 Account until it merged with U.S.
Bancorp in 2001, after which U.S. Bank acted as the depository for the 1845 Account.
6

Acknowledgment Letter, CFTC Fact App’x at 39. The last four digits of the account
initially ended in 9434, but at some point the account number was changed to the number
ending in 1845 (the “1845 Account”). Wasendorf, his then-wife, Connie Wasendorf, and
his son, Russell Wasendorf, Jr., were initially listed as signatories on the 1845 Account,
but at some point Wasendorf became the only signatory on the 1845 Account. On the
same day that Peregrine opened the 1845 Account, Firstar provided Peregrine with an
acknowledgment letter. The acknowledgment letter, signed by then-Vice President of
Firstar, Clifford Mortenson, stated the following:
You have opened [the 1845 Account], as well as a safekeeping
account, with both designated “Peregrine Financial Group,
Inc. Customer Segregated Account.” You have advised us
that the funds deposited . . . in the [1845 Account] constitute
monies belonging or accruing to your futures and options
customers which you are required to segregate from your own
funds under the Commodity Exchange Act . . . . You have
further advised that the securities and other property deposited
in the safekeeping account above described constitute
investments of the funds of your futures and options customers
and securities deposited with you by those futures and options
customers to margin, guarantee or secure the trades or
contracts of your futures and options customers that all such
securities and other property are to be segregated and kept
apart from your own securities and property.
We hereby acknowledge your notice that monies, securities
and other property deposited in the accounts above described
are those of your futures and options customers and are being
held in accordance with the provisions of the Commodity
Exchange Act . . . . We further acknowledge that the monies,
securities and property contained in such accounts shall not be
subject to any right of offset or lien in our favor for or on
account of any indebtedness, obligations or liabilities owing by
you to us.

7

August 3, 1992 Acknowledgment Letter, CFTC Fact App’x at 39.4 At some point,
Wasendorf spoke with Clifford Mortenson about the “concept of segregated funds” and
the requirements of the Act, but it is unclear whether this conversation took place before
or after opening the 1845 Account. See Wasendorf Deposition, CFTC Fact App’x at 6-7.
In the winter of 1993, Wasendorf gave Mortenson a copy of the rules and regulations
pertaining to customer segregated funds and was told that Firstar could comply with such
rules and regulations.
Two individuals at U.S. Bank had primary responsibility for managing U.S. Bank’s
relationship with Wasendorf and his businesses: Douglas Boe (Senior Vice President of
Commercial Lending and Relationship Manager for the Peregrine/Wasendorf relationship,
who officed in Cedar Rapids) and Hope Timmerman (Assistant Relationship Manager for
the Peregrine/Wasendorf relationship, who officed in Cedar Falls).
b.

Funding of the 1845 Account

During the Relevant Period—June 2008 through July 2012— customer checks were
deposited into the 1845 Account at U.S. Bank, and some of these checks were paid to the
order of Peregrine’s customer segregated account. The back of the checks were endorsed
by Peregrine with the following language:
PAY TO THE ORDER OF US BANK FOR DEPOSIT ONLY
PEREGRINE FINANCIAL GROUP, INC. CUSTOMER
SEGREGATED ACCOUNT [1845].
See, e.g., Customer Checks, CFTC Fact App’x at 328-31. Money was also deposited into
the 1845 Account through wire transfers from customers, wire transfers from Peregrine’s
customer segregated account held at JPMorgan Chase and transfers from other Peregrine

4

An additional identical acknowledgment letter, this time signed by Vice President
David G. McDermott, was issued by Firstar to Peregrine on June 10, 1996. See June 10,
1996 Acknowledgment Letter, CFTC Fact App’x at 41.
8

customer-related accounts at U.S. Bank. There were also deposits from non-customer
related sources, including money from Wasendorf himself.
c.

Wasendorf’s fraud

On or about July 9, 2012, Wasendorf admitted to perpetuating a fraud accomplished
by falsifying U.S. Bank records for the 1845 Account. He accomplished this fraud by
opening a post office box—P.O. Box 706—in Cedar Falls, Iowa, which he set up to appear
to be a Firstar, and then a U.S. Bank, address. Early on, Wasendorf created a forged
bank statement that he apparently sent to the NFA and CFTC, which listed, falsely, P.O.
Box 706 as Firstar’s address. As a result, when the NFA or CFTC sent documents,
including account balance confirmations, to Firstar or U.S. Bank, they would arrive at
P.O. Box 706. Wasendorf intercepted the mail that the NFA and CFTC intended to send
to U.S. Bank and, after receiving the mail, Wasendorf used Photoshop and inkjet printers
to alter bank statements and return them to the NFA or CFTC. In so doing, Wasendorf
was able to conceal his fraud from the NFA, CFTC, U.S. Bank employees, his family,
associates and outside auditors. On July 9, 2012, sensing that his fraud was being
uncovered, Wasendorf attempted suicide. He was found in his car with an apparent
suicide note addressed to his wife, Nancy Paladino, and a signed statement detailing his
theft of Peregrine’s customers’ funds and forgery of bank statements and related
documents. On July 10, 2012, CFTC instituted a civil action against Wasendorf and
Peregrine for injunctive relief. See CFTC v. Peregrine Fin. Grp., Inc., No. 12-CV-05383
(N.D. Ill. July 10, 2012). CFTC stated that although Wasendorf’s fraud would have also
merited an award of restitution, it did not seek that relief against Wasendorf because the
judgment in Wasendof’s criminal case had ordered him to pay restitution to defrauded
investors. After initiation of the lawsuit, Peregrine immediately filed for Chapter 7
liquidation in the United States Bankruptcy Court for the Northern District of Illinois. See
In re Peregrine Fin. Grp., Inc., No. 12-BK-27488 (N.D. Ill. July 10, 2012).
9

In

September 2012, Wasendorf pled guilty to embezzling $215.5 million from more than
13,000 Peregrine customers over the course of twenty years. On January 31, 2013, he
was sentenced to fifty years in federal prison by the undersigned. See Judgment, United
States v. Wasendorf, No. 12-CR-2021-LRR (N.D. Iowa January 31, 2013) (docket no.
70).
d.

U.S. Bank’s knowledge of the nature of the 1845 Account

U.S. Bank utilizes two internal computer systems that contain account and client
information, commonly referred to as the Hogan and Wizard systems. U.S. Bank began
utilizing the Hogan system at the latest in 2002 and it is unclear when U.S. Bank began
utilizing the Wizard system. The Hogan and Wizard systems list the 1845 Account title
as “Peregrine Financial Group, Inc.” and list “CEA Customer Segregated Accounts” as
a related customer.
Wasendorf instructed U.S. Bank that communications, including written and
telephonic communications, regarding his accounts should be directed to him. In January
2008, Wasendorf instructed U.S. Bank not to allow any balance confirmations on the 1845
Account, and in October 2009, he requested that any inquiries to U.S. Bank about the 1845
Account be directed to Boe or Timmerman. In addition, Wasendorf instructed U.S. Bank
on multiple occasions that he wanted it to notify him if anyone asked any questions
regarding the 1845 Account. Timmerman testified that Wasendorf, more than other
clients, “seemed very persistent in that he didn’t want anyone talking to anyone else but
[Boe] or [her] on his accounts.” Timmerman Deposition, CFTC Fact App’x at 84.
Timmerman never asked Wasendorf why he was so concerned about restricting account
inquiries to her and Boe.
U.S. Bank “is unaware of any U.S. Bank employee that had responsibility for the
1845 Account who understood the 1845 Account was a customer segregated funds
account” during the Relevant Period. U.S. Bank’s Response to Interrogatory No. 20,

10

CFTC Fact App’x at 75. At his deposition, Boe testified as to his knowledge of customer
segregated accounts as follows:
Q:
A:
Q:

Are you familiar generally with customer segregated
accounts?
I have no idea what that means. Until—Until all this
stuff went down, I had no idea what that meant.
What’s your present understanding of what a customer
segregated account is?

....
A:
I truly do not know what it means to have a segregated
account. I did not believe I had one, so I’m not aware
of the policies, procedures, and rules that would govern
such an account.
Q:
What about the definition? I mean what’s your
understanding as to—Do you have any understanding as
to what customer segregated account means?
A:
No.
Q:
Do you know if you’ve ever had a client that had a
customer segregated account?
A:
No.
Boe Deposition, CFTC Fact App’x at 79. At her deposition, Timmerman testified as
follows:
Q:

A:
Q:
A:
Q:
A:

Peregrine Financial Group, Inc., and that’s the account
ending in 1845. Do you know the purpose of that
account?
No.
And the source of the funds that went into that account?
No.
And that was a business checking account?
Business commercial checking account.

Timmerman Deposition, CFTC Fact App’x at 86.
No U.S. Bank employee ever considered whether the 1845 Account contained
excess funds from Peregrine prior to July 9, 2012, and neither Timmermann nor Boe were
familiar with the concept of excess funds during the Relevant Period.

11

Until after Wasendorf’s suicide attempt in July 2012, U.S. Bank had no policies,
procedures or training specifically applicable to FCM customers or customer segregated
funds. Aside from Peregrine, U.S. Bank had at least eight other FCM customers during
the Relevant Period. U.S. Bank implemented new policies relating to FCM clients after
July 2012.
2.

U.S. Bank’s knowledge of Wasendorf
a.

Other accounts

Peregrine had four other accounts and Wasendorf had several other accounts at U.S.
Bank. On April 24, 1990, Peregrine opened an account ending in 7467 (the “7467
Account,” or “house account”) with Cedar Falls Trust & Savings Bank (“Cedar Falls
T&S”). Cedar Falls T&S eventually became U.S. Bank. The 7467 Account was not a
customer segregated funds account and was sometimes referred to by U.S. Bank
employees as the “house account.” A “house account” is an account of an FCM that does
not contain customer funds. Peregrine also had a second customer segregated funds
account ending in 8590 (the “8590 Account”) at U.S. Bank that was subject to the Act and
Regulations.

Unlike the 1845 Account, which was categorized by the bank as a

commercial checking account, the 8590 Account was categorized as a “custody account.”
August 1, 2012 Letter from Peter Carter, CFTC Fact App’x at 402. Also unlike the 1845
Account, the 8590 Account was unfunded. In addition, Peregrine had a 30.7 Secured
Account, ending in 0394 (the “30.7 Secured Account) and a Foreign Exchange Account,
ending in 3366 (the “Foreign Exchange Account”). See id. at 400-01.
Although Wasendorf conducted a fair amount of business at U.S. Bank in Cedar
Falls, he led U.S. Bank employees to believe that the majority of Peregrine’s banking was
done at larger banks. In fact, in addition to the 1845 Account, Peregrine maintained
multiple other customer segregated accounts at multiple financial institutions worldwide.

12

Wasendorf owned several entities that had accounts at U.S. Bank, including
Wasendorf & Associates, Inc. aka Mountain Town, Inc.; The Peregrine Charities;
Wasendorf Air, L.L.C.; My Verona, L.L.C.; Wasendorf Construction, L.L.C.; Trader
Press, Inc.; Best Kids, L.L.C.; Lit Subsidized Funds; Portfolio Advisor Promotion, Inc.
d/b/a Village Gate Communications; and Wasendorf & Sons Company, Inc. Id. at 400-02.
Finally, Wasendorf and his family owned several accounts at U.S. Bank.
Altogether, Wasendorf, his family and his businesses held twenty-four accounts that were
designated as checking accounts, four accounts that were designated as savings accounts,
two accounts designated as being from a commercial loan, two accounts designated as
being from a mortgage loan, one account designated as being from an installment loan, one
account designated as a safe box, one account designated as a reserve line and one account
designated as a custody account. See id. In the period after 2001, these accounts became
subject to “know your customer” procedures and, when opened, anti-money laundering
procedures. Lisa Rolinger Deposition, CFTC Material Fact App’x at 407.
b.

Finances and relationship

Wasdendorf had cultivated a reputation as a civic leader in the Cedar Falls
community and a leader in the commodities industry, and U.S. Bank was aware of that
reputation. Wasendorf took affirmative steps to “create an impression that [he was] a
legitimate businessman” so that employees of U.S. Bank would view him as “honest and
successful.” Wasendorf Deposition, U.S. Bank’s Summary Judgment Appendix (“U.S.
Bank Summary Judgment App’x”) (docket nos. 80-3 through -5) at 281-82, 285-87.
Wasendorf testified that he “probably gave [Timmerman] [his personal financial statement]
every year since 2000, 2001, something like that.” Wasendorf Deposition, CFTC Fact
App’x at 571.
U.S. Bank was aware of Wasendorf’s divorce from Connie Wasendorf in 2010 and
discussed its impact on his finances with Wasendorf. U.S. Bank employees dined at

13

Wasendorf’s restaurants, My Verona, L.L.C. and Harvest on Huron, donated to The
Peregrine Charities and were invited to Wasendorf’s wedding to Nancy Paladino in June
2012. U.S. Bank viewed Wasendorf as a successful and desirable customer and U.S. Bank
sought opportunities to expand its business with him and his businesses.
3.

Loans

Peregrine guaranteed two loans that U.S. Bank issued to Wasendorf, Connie
Wasendorf and Wasendorf’s companies: (1) a $6.4 million loan (“Construction Loan”) to
Wasendorf Construction, L.L.C. (“Wasendorf Construction”); and (2) a $3 million loan
(“Wasendorf Loan”) (collectively, “Loans”) to Wasendorf and Connie Wasendorf.
Wasendorf Construction was a real estate holding company owned by Wasendorf
and his son, Russell Wasendorf, Jr. The purpose of the Loans was to build an office
building in Cedar Falls to house Peregrine as the primary tenant.
Prior to Peregrine’s bankruptcy, no U.S. Bank employee responsible for the Loans
understood that the 1845 Account was a customer segregated funds account or reviewed
the acknowledgment letters U.S. Bank provided to Peregrine. These acknowledgment
letters stated that the 1845 Account held futures and options customer funds which
Peregrine was required to segregated under the Act and that U.S. Bank could not subject
the 1845 Account to any right of offset or lien.
a.

Credit-approval process

U.S. Bank uses an internal system called the CAPE system as part of its loan
approval process. The CAPE system is used to generate a set of documents called a
Standard Credit Display (“SCD”) that U.S. Bank uses to review and approve loan
requests. SCDs are comprised of qualitative and quantitative information about the
potential borrower and other parties critical to the credit decision, including a summary
of the banking relationship between U.S. Bank and the parties involved; a summary of the
strengths, weaknesses, key risks and risk mitigation factors associated with the credit

14

decision; a financial analysis of the borrower and other critical parties; and collateral
depictions. The SCDs contain all the information necessary for senior credit officers at
U.S. Bank to approve loan requests. An Assistant Relationship Manager typically authors
the SCD that other U.S. Bank employees use in determining whether to approve loans.
The SCD then is approved by a Relationship Manager and, subsequently, depending on
the total loan exposure and the risk rating, by higher-level U.S. Bank employees. The
extension of credit and funding of the loan takes place after loan documents are executed
by the borrower and other parties as per the approval terms and conditions.
b.

September 4, 2008 SCD

In August 2007, Timmerman authored an SCD for the Loans. In preparing the
SCD, Timmerman requested and received Wasendorf’s and Connie Wasendorf’s personal
financial statements and tax returns, Peregrine’s financial statements, Wasendorf
Construction’s financial statements, CFTC Form 1-FRs5 and other information relevant
to U.S. Bank’s decision to issue a loan. Timmerman then entered the relevant information
from these documents into the SCD. On September 4, 2008, U.S. Bank approved
Wasendorf Construction’s request for a $6.4 million loan and the Wasendorfs’ request for
a $3 million loan. Timmerman; Kelly Lind, Vice President of Commercial Real Estate;
Boe; Jeff Lara; and Richard “Dick” Edwards, the final and most senior employee, are
listed as approving the Loans. See September 4, 2008 SCD, CFTC Fact App’x at 445-46.
After the Loans were approved, the SCD was provided to outside counsel, who drafted the
loan documents and the 2008 Guaranty.

5

FCMs are required to complete Form 1-FRs on a monthly basis and submit them
to the CFTC. Form 1-FRs detail the FCM’s assets, including the amount of customer
funds deposited with the FCM.
15

c.

2008 Guaranty—Wasendorf Loan

On approximately September 9, 2008, Peregrine executed a Continuing Guaranty
(Unlimited) (the “2008 Guaranty”) for the Wasendorf Loan. U.S. Bank requested the
2008 Guaranty and knew that Peregrine was the repayment source for both the Wasendorf
Loan and the Construction Loan; the excess cash flow from the rental payments made by
Peregrine, who would be the primary tenant in Wasendorf Construction’s new office
building, to Wasendorf Construction would be used to repay the Loans. The 2008
Guaranty stated, in pertinent part:
Collateral; Setoff. [Peregrine] grants to [U.S. Bank] a security
interest in all property in which [Peregrine] has an ownership
interest which is now or in the future in possession of [U.S.
Bank] to secure payment under this Guaranty. [Peregrine]
hereby authorizes [U.S. Bank], without further notice to
anyone, to charge any account of [Peregrine] for the amount
of any and all Obligations due under this Guaranty, and grants
[U.S. Bank] a contractual right to set off (without notice or
demand) amounts due hereunder against all depository account
balances, cash and other property now or hereafter in the
possession of [U.S. Bank] and the right to refuse to allow
withdrawals from any account (collectively “Setoff”).
2008 Guaranty, CFTC Fact App’x at 534 (emphasis omitted). The 2008 Guaranty, as well
as the 2011 Guaranty discussed below, were signed by Wasendorf pursuant to Peregrine
corporate resolutions that gave him the right “to pledge, assign, mortgage or otherwise
grant a security interest in any or all real property, fixtures, tangible or intangible personal
property, or any other assets of [Peregrine].” 2008 Corporate Resolution, U.S. Bank
Summary Judgment App’x at 111; see also 2011 Corporate Resolution, U.S. Bank’s
Summary Judgment App’x at 114. On or about January 2010, U.S. Bank and the
Wasendorfs executed a First Amendment to Term Loan Agreement and Term Note, which
extended the maturity date of the Wasendorf Loan. Wasendorf also signed this amendment
on behalf of Peregrine, acknowledging that it continued to guarantee the obligations of the
16

Wasendorfs to U.S. Bank. Peregrine was a guarantor on the Wasendorf Loan from
September 9, 2008 until the loan was paid off in mid-February 2010. During this period,
U.S. Bank collected $30,180.59 in interest on the Wasendorf Loan.
d.

July 28, 2011 SCD

Initially, when the Loans were in the process of being approved in September 2008,
Wasendorf told U.S. Bank that Peregrine was not permitted to guarantee the Construction
Loan due to regulatory reasons. At some point, U.S. Bank employees came to the
understanding that a regulatory interpretation had changed, enabling Peregrine to guarantee
the Construction Loan. Boe then began working on a new SCD in April 2011, and on July
28, 2011, U.S. Bank approved the new SCD. This SCD improved the risk ratings of
Wasendorf Construction based upon the guaranty provided by Peregrine.

Edwards

testified that had Peregrine been unable to provide the guaranty at that time, then “[w]e
either would not have renewed the [Construction Loan] and asked him to pay it off and
refinance it, or we would have carried the loan with a weaker PDR rating or asked for
injections to pay the loan balance down such that it would cash flow at a lower debt service
amount.” Edwards Deposition, CFTC Fact App’x at 363. Timmerman, Boe, Lara,
Nancy Kasparek, Steve Caves and Edwards are listed as approving the renewed
Construction Loan. July 28, 2011 SCD, CFTC Fact App’x at 480-81.
e.

2011 Guaranty—Construction Loan

On or about August 5, 2011, Wasendorf on behalf of Peregrine executed a
Continuing Guaranty (Unlimited) (the “2011 Guaranty”), which was also drafted by
outside counsel, for the Construction Loan. The 2011 Guaranty stated, in pertinent part:
Collateral; Setoff. [Peregrine] grants to [U.S. Bank] a security
interest in all property in which [Peregrine] has an ownership
interest which is now or in the future in possession of [U.S.
Bank] to secure payment under this Guaranty. [Peregrine]
hereby authorizes [U.S. Bank], without further notice to
anyone, to charge any account of [Peregrine] for the amount
17

of any and all Obligations due under this Guaranty, and grants
[U.S. Bank] a contractual right to set off (without notice or
demand) amounts due hereunder against all depository account
balances, cash and other property now or hereafter in the
possession of [U.S. Bank] and the right to refuse to allow
withdrawals from any account (collectively “Setoff”).
2011 Guaranty, CFTC Fact App’x at 539-40 (emphasis omitted).
f.

Peregrine references in SCDs

The 2008 and 2011 SCDs contained a section called “depository accounts” that
listed the number of Peregrine depository accounts held by U.S. Bank and the six-month
average balance in those accounts. See September 4, 2008 SCD, CFTC Fact App’x at
447; July 28, 2011 SCD, CFTC Fact App’x at 484. The 1845 Account was included as
a Peregrine depository account and made up the largest portion of the listed six-month
average balances.
g.

U.S. Bank’s actions post-Peregrine bankruptcy

On December 13, 2012, U.S. Bank filed a Proof of Claim in Peregrine’s bankruptcy
case for $6,662,505.38, the amount of Wasendorf Construction’s obligations to U.S. Bank
as of the bankruptcy petition date. In the Proof of Claim, U.S. Bank asserted that
Peregrine’s debt to U.S. Bank was secured only up to the amount of $896,350.56, which
was the balance of Peregrine’s house account. The Proof of Claim contained no assertion
that U.S. Bank had a security interest in any amounts held in the 1845 Account. When
Peregrine’s Bankruptcy Trustee asked U.S. Bank to remit the balance of the 1845 Account
to it, U.S. Bank did so promptly.
4.

Transactions involving the 1845 Account
a.

McCormack Declaration

Transactions involving the 1845 Account are detailed in a declaration and report
prepared by Joy McCormack, who is employed as a Senior Futures Trading Investigator
in the Division of Enforcement of the CFTC. See McCormack Declaration, CFTC Fact
18

App’x at 90.

In July 2012, McCormack was assigned to investigate U.S. Bank’s

involvement in this case and she participated “in the discovery processes including
investigative interviews, testimony, and depositions; performed financial analyses; and
reviewed documents and records obtained by the Division, including . . . bank records
subpoenaed and produced by U.S. Bank [and] loan records produced by U.S. Bank.” Id.
at 90-91. To determine the cash flow in the 1845 Account, McCormack “entered all
transactions from the 1845 Account bank statements into a spreadsheet.” Id. at 94. She
then “entered information into the spreadsheet from supporting documents such as wire
transfers, deposit slips, deposit items, and counter withdrawals.”

Id.

Next,

she

determined “[b]ased upon [her] review of interview notes, transcripts, bankruptcy trustee
reports, and a [Peregrine] customer list, . . . which transactions related to Wasendorf,
[Peregrine] customers, and/or other categories.” Id. To ensure accuracy, she “reconciled
the transactions on the spreadsheet to the bank statements” and, finally, she “prepared a
summary of [her] review of the cash flow in the 1845 Account, which is supported by a
bank account reconstruction analysis” that she has attached as an exhibit. Id.
(1)

Parties’ arguments

U.S. Bank argues that the McCormack Declaration is inadmissible because she has
not been named as an expert witness and because she lacks personal knowledge. U.S.
Bank Response to CFTC Statement of Material Facts (docket no. 93-2) at 9-10. U.S.
Bank contends that because all of McCormack’s “‘knowledge’ came from either a review
of documents or from out-of-court statements made by other persons” that “her attempt
to serve as a conduit for the evidence in this case runs afoul of [Federal Rule of Evidence]
1002 (the best-evidence rule) and [Federal Rule of Evidence] 802 (hearsay).” Id. at 10.
CFTC contends that the McCormack Declaration “is admissible for purposes of
summary judgment, and the content of [the McCormack Declaration] would be admissible

19

at trial.”

CFTC Reply at 3-4.

CFTC argues that the McCormack Declaration is

admissible pursuant to Federal Rule of Evidence 1006 as a summary of her findings.
(2)

Applicable law and application

Federal Rule of Civil Procedure 56(c)(4) states that a “declaration used to support
or oppose a motion must be made on personal knowledge, set out facts that would be
admissible in evidence, and show that the affiant or declarant is competent to testify on the
matters stated.” Fed. R. Civ. P. 56(c)(4).
“A witness may testify to a matter only if evidence is introduced sufficient to
support a finding that the witness has personal knowledge of the matter.” Fed. R. Evid.
602. Although McCormack was not a party to any of the transactions she summarized,
the court finds that, based on McCormack’s extensive review of the bank records and other
relevant documents, she had personal knowledge of the transactions involving the 1845
Account. See, e.g., FDIC v. Cashion, 720 F.3d 169, 172, 175 (4th Cir. 2013) (finding
that an FDIC employee whose information came from “records and employees” of a bank
had the requisite personal knowledge to support her affidavit); Baker v. Veneman, 256 F.
Supp. 2d 999, 1005 (E.D. Mo. 2003) (“It appears . . . that [a farm loan manager for the
USDA] based his Declaration upon his review of the loan files and his experience as a
Farm Loan Manager. His statements are therefore based upon his personal knowledge and
are not inadmissible hearsay.”); Howard Acquisitions, LLC v. Giannasca New Orleans,
LLC, Civil No. WDQ-09-2651, 2010 WL 3834917, at *3 (N.D. Md. Sept. 28, 2010)
(“The affiant’s personal knowledge may be based on review of files . . . .”); Stenger v.
World Harvest Church, Inc., No. Civ.A.1:04CV00151-RW, 2006 WL 870310, at *12
(N.D. Ga. March 31, 2006) (“Defendant’s argument that the affidavit is not made [with]
‘personal knowledge’ is without merit. Personal knowledge, as innumerable decisions
from the federal courts make clear, can be gleaned from a review of records pertinent to
a given case.”).

20

Certainly, with respect to McCormack’s summary of the transactions involving the
1845 Account, her declaration does not contain hearsay. Her affidavit is based on
documents from U.S. Bank, which, to the extent such documents contain statements, are
not hearsay because they are an opposing party’s statements.

See Fed. R. Evid.

801(d)(2)(A).
U.S. Bank’s contention that McCormack’s declaration violated the best-evidence
rule is without merit. The best-evidence rule states that “[a]n original writing . . . is
required in order to prove its content unless these rules or a federal statute provides
otherwise.” Fed. R. Evid. 1002. However, Federal Rule of Evidence 1006 states that
“[t]he proponent may use a summary, chart, or calculation to prove the content of
voluminous writings . . . that cannot be conveniently examined in court.” Fed. R. Evid.
1006. McCormack has attached much of the documentation on which she relies and
additional documentation is in the CFTC Fact Appendix. Moreover, for purposes of the
transactions involving the 1845 Account, the documentation consists of U.S. Bank
statements and associated documents in U.S. Bank’s possession. It would be inconvenient
to present thousands of documents in court, and U.S. Bank has not questioned the
authenticity of the documents upon which McCormack relies. Accordingly, McCormack’s
summary of the evidence does not violate the best-evidence rule.
Finally, based on McCormack’s experience as an investigator, she is “competent
to testify on the matters stated.” Fed. R. Civ. P. 56(c)(4).
Since the McCormack Declaration is based on “personal knowledge, set[s] out facts
that would be admissible in evidence, and [the CFTC has shown] that the affiant or
declarant is competent to testify on the matters stated,” Fed. R. Civ. P 56(c)(4), the
McCormack Declaration, at least to the extent that McCormack summarizes transactions
involving the 1845 Account, is admissible for purposes of summary judgment.

21

b.

Deposits

During the Relevant Period, $112,453,821.23 was deposited into the 1845 Account.
Of this amount, $11,503,937.67 came from 700 of Peregrine’s customers in the form of
1400 checks and one wire transfer. $94,000,000 came from twelve wire transfers from
another customer segregated account held at JPMorgan Chase. $6,949,883.56 was
transferred from other Peregrine customer-related accounts at U.S. Bank, specifically the
30.7 Secured Account and the Foreign Exchange Account. See McCormack Declaration,
CFTC Fact App’x at 95. These deposits totaled $112,453,821.23. There were also
deposits of $6,522,066.19 from non-customer related sources, including $602,932 from
Wasendorf himself. Cash Flow Summary, CFTC Fact App’x at 148.
c.

Transfers and withdrawals

During the Relevant Period, there were withdrawals of $161,971,259.11 from the
1845 Account. Of this amount, $108,500,000 was withdrawn via twenty wire transfers
to the JPMorgan Chase customer segregated account, $111,345.70 was wired to a
customer and $33,700 was withdrawn by checks issued to four customers. Id. at 95.
Wasendorf withdrew a net amount of $35,665,995.40 from the 1845 Account for
non-customer purposes during the Relevant Period. McCormack Declaration, CFTC Fact
App’x at 96.
Wasendorf, through Timmerman and other U.S. Bank personnel, made many
transfers out of the 1845 Account. For example, on June 13, 2008, Wasendorf telephoned
Timmerman and requested that U.S. Bank transfer $400,000 from the 1845 Account to a
U.S. Bank account for Wasendorf & Associates. Timmerman then asked another bank
employee to process that request. Customer Advice Debit, CFTC Fact App’x at 324.
Also, on December 31, 2010, Wasendorf requested and U.S. Bank transferred $2,469,692
from the 1845 Account to Connie Wasendorf’s U.S. Bank savings account. Id. at 326.

22

Wasendorf also made large in-person counter withdrawals at local U.S. Bank
branches from the 1845 Account to purchase cashier’s checks payable to other entities.
Wasendorf indicated that he would like an entity or person other than Peregrine to be
identified as the payor/remitter on the cashier’s checks. For example, on June 27, 2008,
a counter withdrawal was made from the 1845 Account in the amount of $563,956.02. At
around the same time, a cashier’s check was purchased in the amount of $563,956.02
made payable to Anfinson & Luce Trust, reflecting a payor/remitter of Wasendorf
Construction.
In addition, Wasendorf used the 1845 Account on multiple occasions to pay for fees
and expenses related to Wasendorf Construction and the building of the office building.
For example, on December 1, 2008, Wasendorf Construction’s account, the 0329
Account, had a balance of $7109.83. On December 5, 2008, a telephonic transfer of
$370,000 was made from the 1845 Account to the 0329 Account. On that same date, a
check cleared the 0329 Account in the amount of $371,823.96. No other deposits to the
0329 Account were made during that time.
d.

Payments to U.S. Bank

Under Wasendorf’s direction, certain bank fees for Peregrine accounts and other
Wasendorf entities were automatically deducted on a monthly basis from the 1845
Account.
Also, Wasendorf indirectly used money from the 1845 Account to repay the
Wasendorf Loan. On February 18, 2010, Wasendorf transferred $3,005,150 by electronic
funds transfer from the 1845 Account to the U.S. Bank account in the name of Wasendorf
Construction, which had an account number ending in 0329 (the “0329 Account”). Prior
to receiving the transfer, the 0329 Account had a total balance of $425.13. On February
19, 2010, a check payable to U.S. Bank cleared the 0329 Account, paying off the
outstanding balance of $3,005,150 on the Wasendorf Loan.
23

5.

Audits of Peregrine

CFTC conducted an audit of Peregrine in 1999. In a thirty-five-page report, CFTC
found numerous “material violations” of the Act, including an “inaccurate segregation
record” that violated the Regulations promulgated under the Act. 1999 CFTC Audit, U.S.
Bank Summary Judgment App’x at 616, 633. CFTC also found that Peregrine had made
“intentional misstatements or omissions” to the CFTC and that “oral responses provided
by [Peregrine] appeared to be provided as an attempt to mislead the audit process.” Id. at
643. CFTC recommended that Peregrine be issued a warning letter and the audit findings
be referred to CFTC’s Division of Enforcement for appropriate sanctions. CFTC did not
conduct another audit of Peregrine until 2007, and the audit was a limited review.
The NFA conducted regular, extensive audits of Peregrine. On May 13, 2011, at
the request of Peregrine’s compliance officer, who had no knowledge of the fraud,
Timmerman sent an e-mail to the NFA confirming the actual balance of the 1845 Account,
which accurately reported the balance as $7,181,336.36.

The confirmation form

Timmerman returned listed the 1845 Account as a “Customer Segregated Account” and
listed U.S. Bank’s address as P.O. Box 706, the false address that Wasendorf had used to
intercept mail intended for U.S. Bank. Prior to May 13, 2011, Peregrine had falsely
reported to the NFA that the 1845 Account held in excess of $200 million. Wasendorf
found out about the confirmation—either from the compliance officer or from Timmerman.
Wasendorf then told Timmerman that a mistake had been made in the confirmation and
asked her for a copy of the confirmation form that she had received. Timmerman provided
the confirmation form to Wasendorf, who, on the next business day, sent the NFA a
“corrected” form indicating that the balance was $218,650,550.96, which was signed
under Timmerman’s forged signature. The NFA accepted the “corrected” information
without question and conducted no further investigation.

24

VI. ANALYSIS
In the CFTC Motion, CFTC argues that U.S. Bank violated Section 4d(b) of the Act
and Commission Regulation 1.20 by “treat[ing] the 1845 Account like the personal piggy
bank of . . . Wasendorf . . . , in part by using Peregrine’s customer funds to guarantee
multi-million dollar loans to Wasendorf, his wife, and one of his companies and allowing
Wasendorf to withdraw funds from the 1845 Account as he pleased.” CFTC Motion at
1. CFTC contends that it is entitled to judgment as a matter of law as to Count 1,
improper use of Peregrine’s customer funds in violation of Section 4d(b) of the Act and
Regulation 1.20; and Count II, improper holding of Peregrine’s customer funds in
violation of the same provisions. CFTC contends that U.S. Bank’s violations “enabled
Wasendorf to steal $215 million of Peregrine customer funds before Peregrine collapsed
in July 2012.” Id. In addition, CFTC argues that U.S. Bank’s affirmative defense of
unclean hands is without merit.
In the U.S. Bank Motion, U.S. Bank argues that all of CFTC’s theories must fail
because it did not “hold” or “use” the funds in violation of the Act and the Regulations.
A. The Act and the Regulations
Although this case is factually complex, its resolution is governed primarily by the
interpretation of two provisions of federal law: Section 4d(b) of the Act, codified at 7
U.S.C. § 6d(b), and Commission Regulation 1.20(a), codified at 17 C.F.R. § 1.20(a).
7 U.S.C. § 6d(b) states, in pertinent part:
It shall be unlawful for . . . any depository . . . that has
received any money, securities, or property for deposit in a
separate account . . . to hold, dispose of, or use any such
money, securities, or property as belonging to the depositing
futures commission merchant or any person other than the
customers of such futures commission merchant.
7 U.S.C. § 6d(b). Similarly, 17 C.F.R. § 1.20(a) states, in pertinent part:

25

No person, including any [] depository, that has received
futures customer funds for deposit in a segregated account, as
provided in this section, may hold, dispose of, or use any such
funds as belonging to any person other than the futures
customers of the futures commission merchant which deposited
such funds.
17 C.F.R. § 1.20(a) (2013). Also at issue is 17 C.F.R. § 1.23, which states:
The provisions in section 4d(a) and 4d(b) of the Act and the
provision in § 1.20(c), which prohibit the commingling of
futures customer funds with the funds of a futures commission
merchant, shall not be construed to prevent a futures
commission merchant from having a residual financial interest
in the futures customer funds, segregated as required by the
Act and the rules in this part and set apart for the benefit of
futures customers; nor shall such provisions be construed to
prevent a futures commission merchant from adding to such
segregated futures customer funds such amount or amounts of
money, from its own funds or unencumbered securities from
its own inventory, of the type set forth in § 1.25, as it may
deem necessary to ensure any and all futures customers’
accounts from becoming undersegregated at any time.
17 C.F.R. § 1.23 (2013). Pursuant to the Act and Regulations, it is undisputed that
Peregrine was an FCM, the 1845 Account was a customer segregated account and U.S.
Bank was a depository. The issue is whether U.S. Bank violated the Act and Regulations.
B. Improper Use of Customer Funds
The parties dispute three issues regarding whether U.S. Bank improperly used
customer funds in the 1845 Account: (1) whether the 1845 Account was subject to the 2008
Guaranty and 2011 Guaranty; (2) if so, whether U.S. Bank violated the Act and
Regulations by acquiring a right to set off the debt from the Loans with the customer funds
in the 1845 Account or, if merely acquiring a right is not enough, whether they violated
the Act and Regulations by taking preliminary actions in attempt to set off the debt from

26

the customer funds in the 1845 Account; and (3) whether U.S. Bank improperly used the
funds in the 1845 Account [when deciding] whether to issue the Loans.
1.

Was the 1845 Account subject to the Guaranties?
a.

Parties’ arguments

In the CFTC Motion, CFTC argues that U.S. Bank “improperly used the customer
funds in the 1845 Account as part of two [G]uarant[i]es U.S. Bank obtained as security”
for the 2008 Construction Loan and the 2011 Wasendorf Loan. CFTC Brief in Support
of the Motion (docket no. 77-1) at 14. CFTC contends that “[a]t the time the loan
documents and [G]uarant[i]es were executed . . . , U.S. Bank understood the 1845
Account was a Peregrine depository account in the possession of U.S. Bank and intended
for [the 1845 Account] to be included as part of the [G]uarant[i]es.” Id. at 15.
U.S. Bank argues that it could not have violated the Act and the Regulations with
respect to the Loans and the Guaranties because the Guaranties “did not grant U.S. Bank
a security interest in or setoff rights against customer funds.” U.S. Bank Brief in Support
of the Resistance (docket no. 93-1) at 8 (emphasis omitted). U.S. Bank asserts that “[t]he
unambiguous terms of the Guaranties did not grant U.S. Bank a security interest in or
setoff rights against customer funds.” Id. (emphasis omitted). Moreover, U.S. Bank
contends that even if the court looks at extrinsic evidence to determine whether the 1845
Account was subject to the Guaranties, “it would find undisputed material facts
establishing that neither U.S. Bank nor [Peregrine] intended to give U.S. Bank a security
interest in or setoff rights against customer funds.” Id. at 10.
b.

Applicable law

As an initial matter, the court shall apply Iowa law when analyzing the meaning of
the 2008 Guaranty and the 2011 Guaranty given that both parties and the court agree that
Iowa law controls with respect to this issue. Cf., e.g., Epps v. Stewart Info. Servs. Corp.,
327 F.3d 642, 649 (8th Cir. 2003) (“State law is viewed to determine whether and how
27

to pierce the corporate veil.”); In re Nerland Oil, Inc., 303 F.3d 911, 917 (8th Cir. 2002)
(“We apply federal law to determine the priority order of liens competing with federal tax
liens. However, we apply state law to determine the competing legal interest at stake.”
(citation omitted)).
In Hartig Drug Co. v. Hartig, 602 N.W.2d 794 (Iowa 1999), the Iowa Supreme
Court discussed the rules of contract interpretation. The Iowa Supreme Court stated:
A cardinal rule of contract construction or interpretation
is the intent of the parties must control. Whalen v. Connelly,
545 N.W.2d 284, 291 (Iowa 1996). The important time frame
for determining this intent is the time the contract was
executed. Davenport Osteopathic Hosp. Ass’n v. [Hosp.]
Serv., Inc., 261 Iowa 247, 260, 154 N.W.2d 153, 161 (1967).
If the contract is ambiguous and uncertain, extrinsic evidence
can be considered to help determine the intent. Yet, a contract
is not ambiguous merely because the parties disagree over its
meaning. Tom Riley Law Firm, P.C. v. Tang, 521 N.W.2d
758, 759 (Iowa [Ct.] App. 1994). Instead, an ambiguity
occurs in a contract when a genuine uncertainty exists
concerning which of two reasonable interpretations is proper.
Berryhill v. Hatt, 428 N.W.2d 647, 654 (Iowa 1988). The
existence of an ambiguity, however, can be determined only
after all pertinent rules of interpretation have been considered.
Id. Our general rules of interpretation are used both to
determine what meanings are reasonably possible as well as to
choose among two reasonable meanings.
Restatement
(Second) of Contracts § 202 cmt. a (1981).
Id. at 797. The Iowa Supreme Court expounded upon its rules of contract interpretation
a month later in Fausel v. JRJ Enters., Inc., 603 N.W.2d 612 (Iowa 1999), when it stated:
“Words and other conduct [related to contracts] are interpreted in the light of all the
circumstances, and if the principal purpose of the parties is ascertainable[,] it is given great
weight.” Id. at 618 (quoting Restatement (Second) of Contracts § 202(1)). The Iowa
Supreme Court disagreed with “cases that say extrinsic evidence cannot change the plain
meaning of a writing,” and clarified that “‘meaning can almost never be plain except in
28

a context.’” Id. (quoting Restatement (Second) of Contracts § 212 cmt. b). “Therefore,
the rule that words and other conduct are interpreted in the light of all the circumstances
is not limited to cases when ambiguity in the agreement exists.” Id. (emphasis added).
“[W]hen the meaning of an agreement depends on extrinsic evidence, a question of
interpretation is left to the trier of fact unless ‘the evidence is so clear that no reasonable
person would determine the issue in any way but one.’” Id. (quoting Restatement (Second)
of Contracts § 212 cmt. e). However, “‘the words of an integrated agreement remain the
most important evidence of intention.’” Id. (emphasis omitted) (quoting Restatement
(Second) of Contracts § 212 cmt. b).
c.

Application

The essence of the dispute is that the parties disagree on what the contracting parties
intended when Peregrine granted a “security interest in all property in which [Peregrine]
has an ownership interest.” 2008 Guaranty, CFTC Fact App’x at 534 (emphasis added);
2011 Guaranty, CFTC Fact App’x at 539 (emphasis added). If the contracting parties
intended this “property” to include the 1845 Account, then U.S. Bank may be liable for
improperly using the 1845 Account as security for loans it made to Peregrine. However,
if the contracting parties did not intend this “property” to include the 1845 Account, then
U.S. Bank would have no liability under the law for improperly using the 1845 Account
as security for the loans because the 1845 Account was not part of the security referenced
in the Guaranties.
The court concludes that, while the language may be unambiguous, the meaning of
the language in the Guaranties depends on extrinsic evidence in light of the context of the
dispute. See Fausel, 603 N.W.2d at 618 (“[T]he rule that words and other conduct are
interpreted in the light of all the circumstances is not limited to cases when ambiguity in
the agreement exists.”).

29

Both parties present evidence that could lead a reasonable trier of fact to find that
the Guaranties did—or did not—create a security interest in the 1845 Account. For
example, U.S. Bank asserts that it did not consider whether it had a specific right to setoff
in the 1845 Account because it “would identify specific assets subject to the security
interest and setoff provisions in the Guaranties only if there were a default on a loan and
[Peregrine] did not fulfill its obligations under the Guaranties.” U.S. Bank Brief in
Support of the Resistance at 10. U.S. Bank also notes that Wasendorf was “not aware of
[U.S. Bank] putting a lien [on] or encumbering [the 1845 Account] in any fashion.”
Wasendorf Deposition, U.S. Bank Resistance Appendix (“U.S. Bank Resistance App’x”)
(docket nos. 93-4 through -10) at 155. On the other hand, CFTC points to the testimony
of Lara, a U.S. Bank manager, responsible, in part, for approving the Loans, who stated
that as of July 13, 2012, he “assumed that [U.S. Bank] had that right [to offset against the
1845 Account] ultimately if [it] needed to.” Lara Deposition, CFTC Fact App’x at 350.
Although the relevant time for determining the intent of the parties is at the time the
contract was entered into, a reasonable fact finder could find that U.S. Bank intended for
the 1845 Account to be subject to the Guaranties based on this, and other, evidence.6
As the Iowa Supreme Court stated in Fausel, “[w]hen the meaning of an agreement
depends on extrinsic evidence, a question of interpretation is left to the trier of fact” unless
there is only one reasonable meaning. Fausel, 603 N.W.2d at 618. Both parties present
admissible evidence that creates a genuine issue on whether the parties did—or did
not—intend the 1845 Account to be subject to the Guaranties, which is a material fact at
issue. Accordingly, to the extent that U.S. Bank requests that the court grant summary

6

For example, no U.S. Bank employee understood the 1845 Account to be a
customer segregated account and instead treated the 1845 Account as a commercial
checking account, which supports CFTC’s contention that U.S. Bank intended the 1845
Account to be subject to the Guaranties.
30

judgment with respect to Count 1 because it did not have an “ownership” interest in the
1845 Account, the U.S. Bank Motion shall be denied.
2.

Is merely acquiring a right of set off unlawful, or were any other actions
by U.S. Bank in enforcing the Guaranties unlawful?
a.

Parties’ arguments

Next, CFTC argues that the Guaranties granted a “right of set off . . . effective as
of the date the loan documents and [G]uarant[i]es were executed, September 9, 2008 and
August 5, 2011” and that the “Act and Regulations prohibit even potential restrictions on
the liquidity of customer funds, including the right of set off, which U.S. Bank obtained
through the . . . [G]uarant[i]es.” CFTC Brief in Support of the Motion at 16-17. In the
event that merely granting a right to set off of customer funds is not a violation of the Act
or Regulations, CFTC contends that “U.S. Bank only refrained from setting off the debt
from the [Loans] with the funds in the 1845 Account because the Peregrine bankruptcy
trustee made it clear to U.S. Bank that it was not permitted to assert any security interest
against the 1845 Account.” Id. at 17.
U.S. Bank argues that, even if the 1845 Account was subject to the Guaranties,
“[t]he [Act] and related legislative history show that Congress only intended Section 4d(b)
to prohibit a depository from actually offsetting against or otherwise misappropriating
customer funds, nothing more.” U.S. Bank Brief in Support of the Resistance at 6. U.S.
Bank contends that “[i]t is undisputed that U.S. Bank never actually used customer funds
to offset [Peregrine’s] obligations to [U.S. Bank]” and, accordingly, the court should grant
U.S. Bank’s Motion on Count 1. Id. at 7.
b.

Applicable law

The Act and the Regulations prohibit a depository from “us[ing] any such money,
securities, or property [in a customer segregated account] as belonging to the depositing

31

futures commission merchant or any person other than the customers of such futures
commission merchant.” 7 U.S.C. § 6d(b); 17 C.F.R. § 1.20(a).
When construing the meaning of federal statutes, “[t]he starting point in discerning
congressional intent . . . is the existing statutory text.” Lamie v. United States Trustee,
540 U.S. 526, 534 (2004). “It is well established that ‘when the statute’s language is
plain, the sole function of the courts—at least where the disposition required by the text
is not absurd—is to enforce it according to its terms.’”

Id.

(quoting Hartford

Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000)); accord
Owner-Operator Indep. Drivers Ass’n v. United Van Lines, LCC, 556 F.3d 690, 693 (8th
Cir. 2009). This rule “results from ‘deference to the supremacy of the Legislature, as well
as recognition that Congressmen typically vote on the language of a bill.’” Lamie, 526
U.S. at 538 (quoting United States v. Locke, 471 U.S. 84, 95 (1985)). Therefore,
“[w]here the plain meaning of a statute is clear, ‘[courts] are not free to replace it with an
unenacted legislative intent.’” Owner-Operator Indep. Drivers Ass’n, 556 F.3d at 693
(quoting INS v. Cardoza Fonseca, 480 U.S. 421, 453 (1987) (Scalia, J., concurring)).
However, “judicial deference to the plain meaning of a statute is not an absolute.”
Id. “One exception consists of those ‘rare cases’ when a statute’s plain text produces a
result ‘demonstrably at odds with the intentions of its drafters, and those intentions must
be controlling.’” Id. (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571
(1982)). Another exception occurs when the language of the statute is ambiguous. If the
legislature has left an ambiguity in the statute, the statutory ambiguity should be resolved
by the administrative agency rather than the courts. City of Arlington, Tex. v. FCC, __
U.S. __, __, 133 S. Ct. 1863, 1868 (2013) (citing Chevron U.S.A., Inc. v. Natural Res.
Def. Counsel, Inc., 467 U.S. 837 (1984)); see also id. at 1874 (“Where Congress has
established a clear line, the agency cannot go beyond it; and where Congress has
established an ambiguous line, the agency can go no further than the ambiguity will fairly

32

allow. But in rigorously applying the latter rule, a court need not pause to puzzle over
whether the interpretive question presented is ‘jurisdictional.’ If ‘the agency’s answer is
based on a permissible construction of the statute,’ that is the end of the matter.” (quoting
Chevron, 467 U.S. at 842)).
c.

Application

The language of 7 U.S.C. § 6d(b) is plain, so “the sole function of the court . . .
is to enforce it according to its terms.” See Lamie, 540 U.S. at 534 (quoting Hartford
Underwriters Ins. Co., 530 U.S. at 6) (internal quotation marks omitted). Accordingly,
the court will give the term “use” its plain meaning.
As the court discussed above, a reasonable jury could conclude that the 1845
Account was part of the security interest granted to U.S. Bank in the Guaranties. Given
the plain meaning of the word “use” and even accepting one of U.S. Bank’s own
definitions of “use” as to “avail oneself of,” see U.S. Bank Motion at 4, the court finds
that even if all U.S. Bank did was acquire a right to set off—and did not actually seek to
enforce that right—it “used,” or availed itself, of the 1845 Account when it entered into
the Guaranties with Peregrine, both of which enabled U.S. Bank to collect interest on the
associated Loans.
The court notes that this is not a case “when a statute’s plain text produces a result
‘demonstrably at odds with the intentions of its drafters, [in which case] those intentions
must be controlling.’” Owner-Operator Indep. Drivers Ass’n, 556 F.3d at 693 (quoting
Griffin, 458 U.S. at 571). Congress’s purpose in adding subsection (b) was to ensure that
depositories did not offset the debts of FCMs with customer accounts or misappropriate
customer funds in any way. See S. Rep. No. 90-947 (1968), reprinted in U.S.C.C.A.N.
1673, 1679. If U.S. Bank used the 1845 Account as security on the Loans, there was a
risk that U.S. Bank would encumber the customer funds and use them to offset Peregrine’s
debts. Eliminating this risk is precisely the result Congress was trying to achieve. See id.

33

Although not entitled to Chevron deference, see Christensen v. Harris Cnty., 529 U.S.
576, 578 (2000), agency interpretation also supports this reading of “use,” emphasizing
the importance of customer funds not being restricted in any way.

See CFTC

Interpretative Letter No. 79-1, CFTC Summary Judgment Appendix (“CFTC Summary
Judgment App’x”) (docket no. 77-2) at 3 (“[I]t is clear that under Section 4d(2) a bank
may not use customers’ funds to set-off any liability of the futures commission merchant.
For example, a bank may not use customers’ funds as security for a loan to the futures
commission merchant or subject the funds to any right, charge, security interest, lien or
claim of any kind in favor of the bank . . . .”); see also CFTC Interpretation No. 10,
CFTC Summary Judgment App’x at 28 (“[I]t has always been . . . [CFTC]’s position that
customer funds deposited in a bank cannot be restricted in any way, that such funds be held
for the benefit of customers and must be available to the customer and the FCM
immediately upon demand.”). Accordingly, the court shall deny the U.S. Bank Motion
to the extent it requests that the court grant summary judgment on Count 1 based on U.S.
Bank’s contention that it did not actually use the customer funds in the 1845 Account to
set off Peregrine’s obligations under the Loans.7
3.

Did U.S. Bank improperly use the customer funds in the 1845 Account to
inform its decision on whether to issue the Loans?

Even if a jury were to find that the Guaranties did not grant U.S. Bank a security
interest in the 1845 Account, CFTC contends that U.S. Bank violated the Act and the
Regulations if it considered the customer funds in the 1845 Account when deciding
whether to issue the Loans.
7

The court finds that it is unnecessary to determine whether U.S. Bank “used” the
customer funds in the 1845 Account by allegedly attempting to set off the outstanding debt
on the Loans with the customer funds in the 1845 Account in the bankruptcy proceedings.
There is no need to do so because the court has determined, as a matter of law, that if a
jury finds that the 1845 Account was subject to the Guaranties, U.S. Bank “used” the
customer funds in the 1845 Account unlawfully merely by acquiring a right to set off.
34

a.

Parties’ arguments

CFTC argues that “Peregrine’s customer segregated funds, including the 1845
Account, were improperly used by U.S. Bank in deciding to issue, modify, and/or extend
the [Construction Loan and Wasendorf Loan].” CFTC Brief in Support of the Motion at
17. CFTC claims that when determining whether to approve the Loans, U.S. Bank loan
officers relied on “[s]ix[-]month average balances of Peregrine’s depository accounts held
at U.S. Bank, including the 1845 Account,” which were listed on the SCDs. Id. For
example, CFTC argues that the funds in the 1845 Account were considered “assets” of
Peregrine and that the “metric ‘return on assets’ included customer segregated funds in the
denominator.” Id. at 17-18.
U.S. Bank argues that the Act “does not prohibit a lending institution from merely
noting the existence of accounts containing customer segregated funds in the process of
deciding whether to make a loan.” U.S. Bank Brief in Support of the Resistance at 13.
U.S. Bank contends that “[t]here is no reasonable construction of ‘hold’ or ‘use’ that
includes ‘consider’ or ‘describe,’ and there is simply no legal or practical basis for
imposing such a restriction upon banks.” Id. And, even if banks are prohibited from
considering customer funds in determining whether to issue a loan, U.S. Bank argues that
“the undisputed facts demonstrate that U.S. Bank did not do so here.” Id.
b.

Applicable law and application

The court has discussed the applicable law pertaining to the meaning of “use” above
and, accordingly, will not discuss it further.
The court finds that even if U.S. Bank considered the customer funds in the 1845
Account in making its decision to issue the Loans, such consideration does not violate the
Acts or the Regulations. The purpose of the Act and the Regulations is to ensure that
customer funds are not used to set off the debts of FCMs with customer accounts or
misappropriated in any way. Merely considering the fact that these customer funds existed
35

when deciding whether to issue the Loans does not mean that U.S. Bank “used” these
funds in the way that it did if the jury finds that Peregrine granted U.S. Bank a security
interest in the 1845 Account. In fact, aside from the potential security interest discussed
above, U.S. Bank had no more interest in the customer funds in the 1845 Account prior
to issuing the Loans than they did after issuing the Loans. Again, this is unlike granting
a security interest in the customer funds, which could restrict the funds, potentially in a
volatile market, while the parties litigate whether the previously granted security interest
is valid. Moreover, an interpretation of “use” that would prohibit a bank from considering
the funds in a customer segregated account would effectively prevent an FCM from
guaranteeing a loan, or, at the very least, expose banks to an inordinate amount of liability.
Certainly a bank should be entitled to, for example, look at the five-year history of
customer deposits of an FCM to determine whether the FCM is a growing or declining
business, and this is no way restricts the customer funds. Accordingly, the court shall
grant U.S. Bank’s Motion to the extent it argues that it did not improperly “use” the
customer funds, thereby violating the Act and the Regulations, by considering them when
deciding whether to issue the Loans.
4.

Summary

With respect to Count 1, the only issue for trial is whether the 2008 Guaranty and
2011 Guaranty granted U.S. Bank a security interest in the 1845 Account. If so, U.S.
Bank violated the Act and the Regulations with respect to Count 1. If not, U.S. Bank did
not violate the Act and the Regulations with respect to Count 1.
C. Improper Holding of Customer Funds
In the CFTC Motion, CFTC argues that U.S. Bank improperly held the customer
funds in the 1845 Account by “allow[ing] and facilitat[ing] Wasendorf’s withdrawals of
at least $35,665,995.40 from the 1845 Account for purposes that U.S. Bank knew or

36

should have known were not for the benefit of Peregrine’s customers.” CFTC Brief in
Support of the Motion at 21.
U.S. Bank argues that the Act and the Regulations, “when applied to banks, merely
prohibit[] banks from using customer funds to offset FCM liabilities to the banks or
otherwise actually misappropriating the customer funds in some way—actions taken by the
bank for its own benefit.” U.S. Bank Brief in Support of the Motion (docket no. 93-1) at
28. U.S. Bank claims that it “did none of these things and thus did not violate the Act.”
Id.
The threshold issue in determining whether U.S. Bank improperly held the customer
funds in the 1845 Account by allowing Wasendorf to withdraw money from the 1845
Account for purposes not for the benefit of Peregrine’s customers is determining whether
depositories have a duty to assure that customer funds, while in their possession, are not
misappropriated by an FCM.
1.

Duty
a.

Parties’ arguments

CFTC argues that “[a] bank is liable for violating Section 4d(b) and Regulation
1.20(a) if it knew or should have known of the misappropriation or intended
misappropriation of customer funds.” CFTC Brief in Support of the Motion at 18-19.
CFTC relies on the principles of trust law in support of its position on the appropriate
standard of care.
U.S. Bank contends that it did nothing prohibited by the Act in allowing Wasendorf
to transfer money out of the 1845 Account, because it was not for its own benefit.8 U.S.

8

The court addressed this argument in a prior order. See November 5, 2013 Order
(docket no. 18) at 25-26. It is undisputed that many of Peregrine’s customers deposited
their money into the 1845 Account at U.S. Bank and, therefore, U.S. Bank, pursuant to
the plain language of 7 U.S.C. § 6d(b), was required to hold this money as belonging only
(continued...)
37

Bank further argues that even if the court accepts CFTC’s position that U.S. Bank’s duties
are analogous to those of fiduciaries in trust law, it did not have actual knowledge of the
impropriety of the withdrawals or otherwise act in bad faith. U.S. Bank contends that
there is no support for holding a depository liable for facilitating impermissible
withdrawals based on negligence principles.
b.

Applicable law

As discussed above, 7 U.S.C. § 6d(b) makes it “unlawful for . . . any depository
. . . that has received any money, securities, or property for deposit in a separate account
. . . to hold . . . such money, securities, or property as belonging to the depositing futures
commission merchant or any person other than the customers of such futures commission
merchant.” 7 U.S.C. § 6d(b); see also 17 C.F.R. § 1.20(a) (“No person, including any
. . . depository, that has received futures customer funds for deposit in a segregated
account, as provided in this section, may hold . . . such funds as belonging to any person
other than the futures customers of the futures commission merchant which deposited such
funds.”). The plain language of the Act and the Regulations contains no reference to the
standard of care a depository must exercise in meeting its duties and, therefore, a
depository’s duties are ambiguous with respect to holding funds for the customer’s benefit.
When the legislature has left an ambiguity in the statute, the statutory ambiguity
should be resolved by the administrative agency rather than the courts. City of Arlington,
Tex., 133 S. Ct. at 1868 (citing Chevron, 467 U.S. 837); see also Christensen, 529 U.S.
at 586-87 (“In Chevron, we held that a court must give effect to an agency’s regulation
containing a reasonable interpretation of an ambiguous statute.”). However, when the

8

(...continued)
to such customers; it was not allowed to permit an FCM or Wasendorf to use the
customer’s money for any purpose other than the benefit of the customers. However, in
exercising this authority, the question is the extent of U.S. Bank’s duty to assure that these
funds were not misappropriated for the benefit of someone other than the customers.
38

agency’s decision is “not one arrived at after, for example, a formal adjudication or noticeand-comment rulemaking,” but is rather an interpretation made in an opinion letter,
“Chevron-style deference” is not warranted. See Christensen, 529 U.S. at 587. “Instead,
interpretations contained in formats such as opinion letters are ‘entitled to respect’ under
. . . Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), but only to the extent that those
interpretations have the ‘power to persuade.’” See id. (quoting Skidmore, 323 U.S. at
140) (parallel citation omitted). Interpretative letters and other similar matters “constitute
a body of experience and informed judgment to which courts and litigants may properly
resort for guidance. The weight of such a judgment in a particular case will depend on the
thoroughness evident in its consideration, the validity of its reasoning, its consistency with
earlier and later pronouncements, and all those factors which give it power to persuade.”
Skidmore, 323 U.S. at 140.
c.

Application

Interpretative Letter 79-1 is a letter on the CFTC’s “views on the responsibility of
banks as depositories for customers’ segregated funds under [the Act].” Interpretative
Letter 79-1, Comm. Fut. L. Rep. (CCH) ¶ 20,835 (May 29, 1979). The letter discusses
the provisions of the Act, the legislative intent behind the provisions and the Regulations,
and it comes to conclusions regarding depositories’ duties with respect to an FCM’s
withdrawal of customer funds. The court finds that, given the systematic way in which
the letter addresses the issue of a depository’s duty to “assure that customer’s funds are
not misappropriated by futures commission merchants,” it has the “power to persuade.”
See Interpretative Letter 79-1; Skidmore, 323 U.S. at 140. In pertinent part, the letter
states the following:
[I]t is clear that . . . a bank may not use customers’ funds to
set-off any liability of the futures commission merchant. For
example, a bank may not use customer funds as security for a
loan to the futures commission merchant or subject the funds
39

to any right, charge, security interest, lien or claim of any kind
in favor of the bank or any person claiming through the bank.
....
There is no case law discussing whether a bank has authority
to assure that customers’ funds are not misappropriated by
futures commission merchants. However, in our view, if a
bank, with prior notice, permits or acquiesces in the withdraw
or use of customers’ funds by a futures commission merchant
for an unlawful purpose, the bank would violate or be aiding
and abetting a violation of the Act. Although the scope of the
bank’s responsibility in circumstances of less than actual notice
appears less clear, we believe it is certainly no less than when
dealing with other trust accounts.
Interpretative Letter 79-1. Thus, as the letter states, unlike using customer funds as
security for a loan to an FCM, which is strictly prohibited under the Act, the question of
a depository’s duty to assure that customer funds are not misappropriated by the FCM is
governed by some standard of care less than strict liability. Although the Act and the
Regulations do not discern a different standard of care for using customer funds and
holding customer funds, the court finds that a different standard of care is appropriate, at
least in the context of the factual circumstances in this case. Accepting a security interest
in a customer segregated account necessarily implicates taking a security interest in
customer funds,9 which is prohibited by the Act, Regulations and agency interpretation.
In contrast, allowing an FCM to make withdrawals from a customer segregated account
does not necessarily involve any wrongdoing, because the funds may actually be
Regulation 1.23 excess funds. Therefore, a depository is not liable for such withdrawals
and resulting misappropriations merely by allowing the withdrawals; something more is
needed. Interpretative Letter 79-1 indicates that a bank violates the Act if it knows an
FCM is withdrawing customer funds for an unlawful purpose and allows it do so anyway.

9

U.S. Bank does not dispute that there were customer funds in the 1845 Account.
40

In the absence of knowledge, Interpretative Letter 79-1 says that a bank’s responsibility
“is certainly no less than when dealing with other trust accounts.” Interpretative Letter
79-1. Because customer segregated accounts are functionally similar to trust accounts, the
court accepts Interpretative Letter 79-1’s articulation of a bank’s duty with respect to
customer segregated accounts as being akin to a bank’s duty with respect to other trust
accounts. The court now turns to address what a bank’s duty is with respect to trust
accounts held at such bank.
2.

Trust accounts

Having determined that trust law governs a bank’s duty to monitor an FCM’s
withdrawals from a customer segregated account, the court must now determine what a
bank’s duties are with respect to other trust accounts. As an initial matter, the court agrees
with the parties that because the Act and the Regulations are matters of federal law,
“courts should interpret it uniformly and impose the same obligations in all jurisdictions.”
U.S. Bank Reply at 11; see also CFTC Resistance at 9 (“The CFTC brought this case in
[the United States District Court for the Northern District of Iowa] under the federal
Commodity Exchange Act alleging U.S. Bank’s violations of federal law—the Act and
Regulations. Consequently, state banking laws, especially those of other jurisdictions, do
not apply.”). Nonetheless, because Interpretative Letter 79-1 persuades the court that trust
law should determine a bank’s duties under the Act in monitoring customer funds, the
court is required to examine trust law from various jurisdictions to determine the prevailing
view of a bank’s responsibilities to monitor fiduciary accounts and, accordingly, the
standard of care that a bank must meet under the Act and the Regulations.
a.

Parties’ arguments

CFTC argues that principles of trust law dictate that if a bank knows or should have
known that a fiduciary—i.e., Peregrine, or Wasendorf as its agent—is misappropriating
funds in a fiduciary account, the bank is under a duty to investigate the misappropriation,
41

prevent it and is liable for losses caused after it had notice of the misappropriation. See
CFTC Brief in Support of the Motion at 11-12. CFTC primarily relies on Lerner v. Fleet
Bank, N.A., 459 F.3d 273 (2d Cir. 2006), in support of its position.
U.S. Bank contends that “[n]umerous courts have declined to follow Lerner and its
interpretation of New York law because it deviates from ‘the universal rule in this country’
that, absent facts that would support the sole inference of misappropriation, a bank ‘owes
third parties no duty of care to monitor a customer’s activities.’” U.S. Bank Brief in
Support of the Resistance at 17 (quoting Fremont Reorganizing Corp. v. Duke, 811 F.
Supp. 2d 1323, 1344-45 (E.D. Mich. 2011)). U.S. Bank argues that to the extent that
CFTC argues that Lerner supports a negligence standard, “[s]ome courts have . . .
concluded that Lerner stands for the proposition that a reasonably prudent person will not
suspect misappropriation unless the circumstances compel the sole inference that
misappropriation is intended.” Id. at 18. U.S. Bank contends that “[t]o interpret and
apply Lerner any other way would contravene the well-established rule in this country that
a showing of bad faith is required to impose liability on banks for misappropriations of
their fiduciary-customers.” Id. In summary, U.S. Bank argues that “trust law principles
dictate that U.S. Bank owed no duty to monitor transactions from the 1845 Account absent
either actual knowledge of Wasendorf’s wrongdoing or the presence of circumstances that
give rise to the sole inference that Wasendorf was misappropriating customer funds.” Id.
at 18-19.
b.

Applicable law

The first issue in determining a bank’s duty under the Act, in accordance with trust
law, is determining what trust law to apply. Interpretative Letter 79-1 merely states that
a bank’s duty “is certainly no less than when dealing with other trust accounts.”
Interpretative Letter 79-1. Based on the context of Interpretative Letter 79-1, including
that it mentions that an FCM “must put a bank on notice as to the nature of customers’
42

accounts,” it appears that CFTC, when it wrote the letter, believed this duty existed based
on the nature of the account itself. In other words, like other trust accounts, the bank has
notice that a customer segregated account is a special type of account, which imposes upon
the bank the same duties as it has with respect to other trust accounts.
The court begins its analysis by examining Lerner, which is the only case upon
which CFTC relies for its assertion that banks are subject to a negligence standard in
monitoring the potentially unlawful transactions of a customer-fiduciary.
In Lerner, the Second Circuit Court of Appeals applied New York law to determine
whether a depository bank has a duty to monitor fiduciary accounts held at such bank to
safeguard the funds from fiduciary misappropriation. Lerner, 459 F.3d at 287. The
Lerner court noted that “[a]s a general matter, ‘a depositary bank has no duty to monitor
fiduciary accounts maintained at its branches in order to safeguard funds in those accounts
from fiduciary misappropriation.’” Id. (quoting Norwest Mortg., Inc. v. Dime Sav. Bank
of N.Y., 721 N.Y.S.2d 94, 95 (N.Y. App. 2001)). Consequently, “[t]he bank has the right
to presume that the fiduciary will apply the funds to their proper purpose under the trust.”
Id. (quoting Bischoff ex rel. Schneider v. Yorkville Bank, 112 N.E. 759, 760 (N.Y. 1916))
(internal quotation marks omitted).
However, the Lerner court noted that “a bank may be liable for participation in
[such a] diversion either by itself acquiring a benefit, or by notice or knowledge that a
diversion is intended or being executed.” Id. (alteration in original) (quoting In re Knox,
477 N.E.2d 448, 451 (N.Y. 1985)) (internal quotation marks omitted). “Adequate notice
may come from circumstances which reasonably support the sole inference that a
misappropriation is intended, as well as directly.” Id. (quoting Bischoff, 112 N.E. at 761)
(internal quotation marks omitted). If a bank has such notice, it is “under the duty to make
reasonable inquiry and endeavor to prevent a diversion.” Id. at 288 (quoting Bischoff, 112
N.E. at 761) (internal quotation marks omitted); see also Norwest Mortg., Inc., 721
43

N.Y.S.2d at 95 (“Facts sufficient to cause a reasonably prudent person to suspect that trust
funds are being misappropriated will trigger a duty of inquiry on the part of a depositary
bank, and the bank’s failure to conduct a reasonable inquiry when the obligation arises will
result in the bank being charged with such knowledge as inquiry would have disclosed.”).
Lerner, however, does not appear to be the majority position. At common law,
banks that held money in trust were required to exercise “the highest degree of vigilance
in the detection of a fiduciary’s wrongdoing.” In re Lauer, 371 F.3d 406, 414 (8th Cir.
2004) (quoting Trenton Trust Co. v. W. Sur. Co., 599 S.W.2d 481, 490 (Mo. 1980) (en
banc), superseded by statute as stated in Chouteau Auto Mart, Inc. v. First Bank of Mo.,
55 S.W.3d 358 (Mo. 2001)).

However, in 1922, the National Conference of

Commissioners on Uniform State Laws adopted the Uniform Fiduciaries Act (“UFA”),
which was “designed to facilitate commercial transactions . . . by relaxing some of the
harsher rules.” Id. (quoting Trenton Trust Co., 599 S.W.2d at 490). Section 7 of the
UFA states the following:
If a deposit is made in a bank to the credit of a fiduciary as
such,10 the bank is authorized to pay the amount of the deposit
or any part thereof upon the check of the fiduciary, signed
with the name in which such deposit is entered, without being
liable to the principal, unless the bank pays the check with

10

See Marion W. Benfield, Jr. & Peter A. Alces, 42 Ala. L. Rev. 475, 485 (1991)
(“In order to accommodate the more expeditious execution of the affairs of its beneficiary,
a fiduciary may open a bank account, with the blessing and often at the direction of its
beneficiary, into which items, payable to the fiduciary for the benefit of the beneficiary,
may be deposited for collection. The fiduciary will likely have signatory authority over
the account, and will therefore be able to make disbursements from the account in a
manner consistent with the interests of its beneficiary. To facilitate operation of the
account, it will likely be opened in the name of the ‘fiduciary as such’ (that is, by actually
identifying the fiduciary’s representative capacity on the account itself). Thereafter, items
for deposit into such an account would be made payable to the ‘fiduciary as such.’”). This
is precisely the situation occurring in this case.
44

actual knowledge that the fiduciary is committing a breach of
his obligation as fiduciary in drawing the check or with
knowledge of such facts that its action in paying the check
amounts to bad faith. If, however, such a check is payable to
the drawee bank and is delivered to it in payment of or as
security for a personal debt of the fiduciary to it, the bank is
liable to the principal if the fiduciary in fact commits a breach
of his obligation as fiduciary in drawing or delivering the
check.
UFA § 7 (1922) (footnote added). Notably, this section proposes a dichotomy in which
banks may draw a check of the fiduciary out of the fiduciary account to another customer
(e.g., to Connie Wasendorf) so long as the bank does not have “actual knowledge that the
fiduciary is committing a breach of his obligation as fiduciary . . . or with knowledge of
such facts that its action in paying the check amounts to bad faith.” UFA § 7. However,
if “such a check is payable to the drawee bank (i.e., U.S. Bank) and is delivered to it in
payment of or as security for a personal debt of the fiduciary to it (i.e., the Loans), the
bank is liable to the principal (i.e., Peregrine’s customers) if the fiduciary in fact commits
a breach of his obligation as fiduciary in drawing or delivering the check.” UFA § 7.
Thus, under the UFA, knowledge of misappropriation or knowledge of such facts as
amounting to bad faith is required to hold a bank liable to the customers in most situations,
but when the fiduciary is using the funds to satisfy its debt to the bank, the bank is liable
to the customers if, in fact, the fiduciary breached its fiduciary obligations, regardless of
whether the bank knew the fiduciary was breaching its fiduciary obligations.
At least twenty-four states, the District of Columbia and the Virgin Islands have
adopted some form of the UFA. See Uniform Business and Financial Laws Locator, Legal
Information Institute, http://www.law.cornell.edu/uniform/vol7#fiduc (last visited Nov.
9, 2014); Peter T. Wendel, The Evolution of the Law of Trustee’s Powers and Third Party
Liability for Participating in Breach of Trust: An Economic Analysis, 35 Seton Hall L.
Rev. 971, 1018 (2005). Many of these states have adopted the language of this particular
45

section of the UFA verbatim. See, e.g., Ala. Code § 19-1-7 (2014); Ariz. Rev. Stat. Ann.
§ 14-7506 (2014); Colo. Rev. Stat. § 15-1-109 (2014); Minn. Stat. § 520.07 (2014).
Others have adopted the language of this particular section with minor variations. See,
e.g., Ohio Rev. Code Ann. § 5815.06.
Courts in states that have not explicitly adopted the UFA have interpreted their
state’s law to repudiate the negligence standard discussed in Lerner. See, e.g., Old
Republic Nat’l Title Ins. Co. v. Landmark Closing Co., No. 4:09CV00422 JLH, 2010 WL
2228436, at *3 (E.D. Ark. June 1, 2011) (“[Plaintiff] suggests that this Court could adopt
the ‘reasonably prudent person’ standard mentioned in Lerner, but . . . under Arkansas
law, a bank does not owe noncustomers a duty to exercise reasonable care.”); Fremont
Reorganizing Corp., 811 F. Supp. 2d at 1345) (“Michigan law, in accord with the
universal rule in this country, holds that a bank’s relationship is with its customers and that
the bank owes third parties no duty of care to monitor a customer’s activities.” (quoting
El Camino Res., Ltd. v. Huntington Nat’l Bank, 722 F. Supp. 2d 875, 907 (W.D. Mich.
2010)) (internal quotation marks omitted)).
The court finds, given that the UFA has been adopted in the majority of
jurisdictions and the court is not aware of any jurisdiction other than New York in which
a negligence standard applies, the UFA establishes a bank’s duties to monitor trust
accounts. CFTC is “charged by Congress with the administration and enforcement of the
Act and the Regulations,” Complaint ¶ 7; Amended Answer ¶ 7, and 7 U.S.C. § 6d(b)
makes it “unlawful for . . . any depository . . . that has received any money, securities,
or property for deposit in a separate account . . . to hold . . . any such money, securities,
or property as belonging to the depositing futures commission merchant or any person
other than the customers of such futures commission merchant.” 7 U.S.C. § 6d(b). In
determining whether U.S. Bank unlawfully held the funds, the court looks to the UFA for
the scope of U.S. Bank’s duties, as discussed above. Therefore, if U.S. Bank acted in a
46

manner that would make it liable to Peregrine’s customers under the UFA, which is akin
to “hold[ing] . . . money, securities, or property as belonging to . . . any person other than
the customers of such futures commission merchant,” then, pursuant to 7 U.S.C. § 6d(b),
CFTC may use its enforcement powers to remedy U.S. Bank’s violation. Accordingly,
the question in determining whether U.S. Bank violated the Act and the Regulations by
allowing Wasendorf to withdraw funds from the 1845 Account is whether U.S. Bank
violated the UFA.
c.

Application

Wasendorf’s withdrawals from the 1845 Account can be characterized as two
different types: (1) those transferred to U.S. Bank for the Loans or as fees for other
accounts; and (2) those transferred to other individuals or entities, such as Connie
Wasendorf and Wasendorf Construction.
(1)

Transfers to U.S. Bank

As the UFA states, “[i]f . . . such a check is payable to the drawee bank and is
delivered to it in payment of or as security for a personal debt of the fiduciary to it, the
bank is liable to the principal if the fiduciary in fact commits a breach of his obligation as
fiduciary in drawing or delivering the check.” UFA § 7. So, if Wasendorf transferred11
money directly from the 1845 Account as payment for his personal debt (i.e., the Loans),
and such transfer was a breach of fiduciary duty, a violation of the UFA would occur.
However, in this case, Wasendorf apparently did not transfer the funds from the 1845
Account directly to U.S. Bank. Rather, the funds first went through an intermediary—the
Wasendorf Construction account. Accordingly, this provision of the UFA is not applicable
and U.S. Bank is not liable merely for accepting funds resulting from Wasendorf’s breach
of a fiduciary duty. See Johnson v. Citizens Nat. Bank of Decatur, 334 N.E.2d 295, 299

11

“Wire transfers are treated the same as checks under the UFA.” Nations Title
Ins. of N.Y., Inc. v. Bertram, 746 N.E.2d 1145, 1150 (Ohio Ct. App. 2000).
47

(Ill. App. Ct. 1975) (applying Illinois’s version of the UFA, which is borrowed from the
UFA, and determining that the bank was not liable because it “did not receive payment in
the form of the draft drawn directly on the principal’s account, but as a check drawn on
[another] account”).

However, as discussed below, U.S. Bank may be liable for

accepting this money if it acted with knowledge that Wasendorf was breaching his
fiduciary duty or otherwise acted in bad faith.
Other transfers at issue are fees that were paid out of the 1845 Account for services
on other accounts that Wasendorf controlled. If one of these other accounts incurred a fee,
the fee amount was automatically debited from the 1845 Account.

For example,

Peregrine’s “house account” incurred some of these fees. See Rita Stanley Deposition,
CFTC Fact App’x at 366-67. UFA § 7 makes clear that if “a check is payable to the
drawee bank and is delivered to it in payment of or as security for a personal debt of the
fiduciary to it, the bank is liable to the principal if the fiduciary in fact commits a breach
of his obligation as fiduciary in drawing or delivering the check.” UFA § 7. It is also
clear that whether the fiduciary is considered Peregrine, or Wasendorf as Peregrine’s
agent, the fiduciary “delivered . . . payment” to U.S. Bank. See id. With regard to
whether the fees are a “personal debt of the fiduciary,” the court does not find that there
is any functional difference between a bank fee for service that is automatically deducted
from a fiduciary account and money taken out of the fiduciary account to, for example,
repay a loan. In each case, the bank is owed money from the fiduciary and the fiduciary
pays the money owed, i.e., its debt, from the fiduciary account. Having found that a bank
fee constitutes a “personal debt of the fiduciary” and that U.S. Bank accepted this money,
U.S. Bank is responsible for this diversion if “the fiduciary in fact commits a breach of
his obligation as fiduciary in drawing or delivering the check.” UFA § 7.
With respect to whether Peregrine, or Wasendorf as Peregrine’s agent, breached
its fiduciary duty in using funds from the 1845 Account to pay bank fees for the “house
48

account,” among other accounts, the record is unclear. Even if the court were to accept
CFTC’s assertion that during the Relevant Period there were no excess funds in the 1845
Account, see CFTC Brief in Support of the Motion at 25,12 which suggests that Peregrine
used customer funds to pay bank fees for other accounts in violation of 7 U.S.C. § 6d(a)
(“[An FCM] shall . . . treat and deal with all money, securities, and property received by
such [FCM] to margin, guarantee, or secure the trades or contracts of any customer of
such [FCM], or accruing to such customer as the result of such trades or contracts, as
belonging to such customer.”), the issue is further complicated. The 1845 Account was
not Peregrine’s only customer segregated account.

Peregrine also had a customer

segregated account at JPMorgan Chase, account number 5330355265 (“JPMorgan
Account”). See Kleinrichert Expert Report, U.S. Bank Summary Judgment App’x at 332;
see also Wasendorf Deposition, U.S. Bank Summary Judgment App’x at 294 (noting that
withdrawals were made from the JPMorgan Account to the 1845 Account); McCormack
Declaration, CFTC Fact App’x at 95 (noting that $94,000,000 was transferred into the
1845 Account from a customer segregated account at JPMorgan. An FCM may transfer
funds between its different customer segregated accounts, see Kleinrichert Expert Report
at 333,13 and so as long as Peregrine had sufficient customer funds in the balance of the
12

The court is unable to determine how CFTC arrived at this determination, but
U.S. Bank agrees that there were no excess funds. U.S. Bank Response to Statement of
Material Facts (docket no. 93-2) at 15-16. The report of CFTC’s own employee, Joy
McCormack, stated that 94.5% of the total deposits in the Relevant Period came from
Peregrine customers, McCormack Declaration, CFTC Fact App’x at 95, and she later
indicates that there was $6,522,066.19 in non-Peregrine related deposits in the 1845
Account, including $602,932 from Wasendorf himself, id. at 148.
13

CFTC has not refuted U.S. Bank’s statement, based on Kleinrichert’s expert
report, that “assuming [Peregrine] maintained a sufficient aggregate balance across all of
its customer segregated accounts at other financial institutions, [Peregrine] could at any
time have lawfully drawn the 1845 Account to zero.” U.S. Bank Brief in Support of the
(continued...)
49

customer segregated accounts at U.S. Bank and JPMorgan, or any other customer
segregated account, Wasendorf may not have been breaching a fiduciary duty by paying
bank fees unrelated to the 1845 Account from funds out of the 1845 Account. That is,
when considering the JPMorgan Account together with the 1845 Account, the fees
withdrawn from the 1845 Account may have been excess funds. Based on the record
before the court, there is a genuine issue of material fact on whether the JPMorgan
Account, or another customer segregated account, had sufficient excess funds to cover the
bank fees for Peregrine and Wasendorf’s other accounts. Or, stated differently, there is
a genuine issue of material fact on whether the aggregate balance of all customer

13

(...continued)
Motion at 17. CFTC’s expert, Andrea Corcoran, does not opine on whether funds in
customer segregated accounts in different depositories are fungible. See Andrea Corcoran
Expert Report, CFTC Summary Judgment Appendix (“CFTC Summary Judgment App’x”)
(docket no. 77-2) at 49. Moreover, the court’s own research has led it to the conclusion
that funds in customer segregated accounts at different depositories are fungible. Form 1FR, which is the form that FCMs must send to the CFTC on a monthly basis, requires
certain declarations. For example, it requires the FCM to indicate the “funds in
segregation for customers trading on U.S. commodity exchanges.” 17 C.F.R. § 1.10.
Nowhere, to this court’s knowledge, do the Regulations require FCMs to report the
amount of customers’ funds held in each depository. Likewise, the Regulations do not
indicate that an FCM needs to file a separate Form 1-FR for each depository that holds
customer segregated accounts. In CFTC’s instructions on how to properly fill out a Form
1-FR, there is no indication that FCMs need to indicate how much of their customers’
money is in each particular depository at which the FCM has a customer segregated
account. See Form 1-FR-FCM Instructions, CFTC (March 2010), available at
http://www.cftc.gov/ucm/groups/public/@iointermediaries/documents/file/1fr-fcminstr
uctions.pdf. Rather, it seems that CFTC’s intention in requiring the Form 1-FRs is to
ensure that, in the aggregate, the FCM has enough customer funds in their customer
segregated accounts. The next logical conclusion is that funds in customer segregated
accounts are entirely fungible, even between different depositories. If it were important
for CFTC to ensure that each specific depository had sufficient customer funds on hand,
it would seemingly require this in the Form 1-FR or require the FCM to provide multiple
Form 1-FRs, one for each depository, neither of which the Regulations do.
50

segregated accounts was sufficient to cover the customer funds even after fees were paid.
Accordingly, at least with respect to whether U.S. Bank improperly held the 1845 Account
by allowing Peregrine to transfer money from the 1845 Account for bank fees not for the
benefit of Peregrine’s customers, the U.S. Bank Motion and the CFTC Motion shall be
denied.
(2)

Transfers to other entities

As discussed above, the transfers from the 1845 Account to other individuals or
entities and withdrawals not for the benefit of Peregrine’s customers are analyzed under
the UFA’s knowledge or bad faith standard. That is, U.S. Bank is liable if it facilitates
a transfer or withdrawal from the 1845 Account “with actual knowledge that the fiduciary
is committing a breach of his obligation as fiduciary” or with “knowledge of such facts
that its action in [facilitating the transaction] amounts to bad faith.” UFA § 7.
(a)

Knowledge
i.

Parties’ arguments

CFTC argues that U.S. Bank facilitated “[n]umerous illegal withdrawals and
transfers . . . that U.S. Bank knew . . . were not for the benefit of Peregrine’s customers
based on its employees discussions with Wasendorf, experience with Wasendorf’s entities
with U.S. Bank accounts, and review of Wasendorf’s financial statements.” CFTC Brief
in Support of the Motion at 21. CFTC also points out that in September 2008, “U.S. Bank
requested and received a financial statement from Peregrine dated August 31, 2004 in
connection with its preparation of the loan documents that contained a line entry for [the
1845 Account] with a corresponding balance of $90,135,225” despite “the balance . . .
never exceed[ing] $54 million.” Id. at 22.14 Additionally, CFTC contends that “U.S.

14

There is no support in the record for the this assertion. Although the McCormack
Declaration makes clear that the 1845 Account never had a balance exceeding $54 million
(continued...)
51

Bank inexplicably complied with Wasendorf’s mandate that all communications regarding
the 1845 Account should be directed to and made with him, that no bank balance
confirmations should be done on the 1845 Account, and that only Timmerman and . . .
Boe should respond to inquiries regarding the 1845 Account.” Id. Moreover, CFTC
asserts that in May 2011, “Timmerman completed a bank balance confirmation form [that]
she received from the [NFA] for the 1845 Account that incorrectly contained a Wasendorfcontrolled post office box as U.S. Bank’s Cedar Falls branch address,” yet no one
“questioned Wasendorf or anyone else about it.” Id. at 23.
U.S. Bank argues that “[t]he undisputed material facts demonstrate that U.S. Bank
did not have actual knowledge of Wasendorf’s wrongdoing.” U.S. Bank Brief in Support
of the Resistance at 19. U.S. Bank notes that “[n]o person at U.S. Bank had any idea
Wasendorf was misappropriating customer funds” and that Wasendorf did not “believe[]
anyone at U.S. Bank was aware of his criminal activity.” Id.
ii.

Applicable law and application

Although a close call, when viewing the evidence in the record in the light most
favorable to CFTC, a reasonable jury could find that U.S. Bank had actual knowledge that
Wasendorf was “committing a breach of his obligation as fiduciary.” UFA § 7. Although
U.S. Bank claims that none of its employees had actual knowledge of Wasendorf’s fraud
and notes that Wasendorf himself stated that he did not “believe[] anyone at U.S. Bank
was aware of his criminal activity,” U.S. Bank Brief in Support of the Resistance at 19,
given the facts of this case as detailed in the following subsection, the court shall allow the

14

(...continued)
during the Relevant Period, it does not indicate what the balance was in August 2004—the
date of the financial statements. See McCormack Declaration, CFTC Fact App’x at 93
(noting that during the Relevant Period the 1845 Account never exceeded $54 million);
Peregrine Statement of Financial Condition, CFTC Fact App’x at 589 (noting the 1845
Account held $90,135,226.26 in August 2004).
52

jury to determine if and when U.S. Bank had actual knowledge that Wasendorf was
“committing a breach of his obligation as fiduciary.” UFA § 7. Accordingly, to the
extent U.S. Bank argues that the court should grant summary judgment in its favor with
respect to whether it violated Section 4d(b) of the Act and Regulation 1.20 by facilitating
transactions out of the 1845 Account with actual knowledge that doing so was a breach of
Wasendorf’s fiduciary duty, the court shall deny the U.S. Bank Motion. The court shall
also deny the CFTC Motion, because a reasonable jury could find that U.S. Bank did not
facilitate transactions out of the 1845 Account with actual knowledge that doing so was a
breach of Wasendorf’s fiduciary duty.
(b)

Bad faith
i.

Parties’ arguments

U.S. Bank argues that it “can be held to have acted in ‘bad faith’ only if it
‘suspected the fiduciary was acting improperly and ‘deliberately refrained from
investigating’ so that the bank could avoid knowledge of the activity.’” U.S. Bank Brief
in Support of the Resistance at 16-17 (quoting Time Savers, Inc. v. LaSalle Bank, N.A.,
863 N.E.2d 1156, 1165 (Ill. App. Ct. 2007)) (internal quotation marks omitted). U.S.
Bank contends that “mere suspicious circumstances” are not sufficient for the bank to have
acted in bad faith by failing to investigate. Id. (quoting Crawford Supply Grp., Inc. v.
LaSalle Bank, N.A., 2010 WL 320299, at *7 (N.D. Ill. Jan. 21, 2010)) (internal quotation
marks omitted). U.S. Bank also suggests that bad faith can be shown by “the presence of
circumstances that give rise to the sole inference that Wasendorf was misappropriating
customer funds.” Id. at 18-19. Under this standard, U.S. Bank contends that it “may
properly assume the propriety of the transaction so long as there are ‘legitimate reasons
why [the fiduciary] might engage in’ the practices that are claimed to be suspicious.” Id.
at 19 (alteration in original) (quoting Johnson, 334 N.E.2d at 300).

53

U.S. Bank argues that it could not “have acted in bad faith because it could not have
determined whether any of the allegedly unlawful withdrawals from the 1845 Account
[were] comprised of customer funds or [Peregrine’s] own funds.” Id. at 21. U.S. Bank
states that “[w]hen funds held in trust are commingled with a fiduciary’s own funds, the
withdrawal of funds from the commingled account can never reasonably support the sole
inference that a misappropriation is intended because there will always be a competing
inference that the withdrawn funds belong to the fiduciary.” Id. (internal quotation marks
omitted). Moreover, U.S. Bank argues that it “had no knowledge of the deposits and
withdrawals that [Peregrine] was making into and out of its customer segregated accounts
at its other banks.” Id. at 23. U.S. Bank also notes that, although it “had received certain
Form 1-FRs from [Peregrine] that reported the amount of excess funds held in segregation,
[U.S. Bank] would not have known about Wasendorf’s wrongdoing even if [it] had
reviewed those documents” because such forms “reported that [Peregrine] kept anywhere
from $6 million to $20 million of excess funds in its customer segregated accounts.” Id.
CFTC never frames its argument under a “bad faith” standard. Rather, it contends
that U.S. Bank knew or should have known that Wasendorf was misappropriating customer
funds. CFTC primarily argues that U.S. Bank acted in bad faith by allowing Wasendorf
to transfer funds to persons and entities U.S. Bank knew were not Peregrine’s customers.
Apart from these transactions, CFTC points to three instances in particular that should
have alerted U.S. Bank to Wasendorf’s fraud.
The first involves “Wasendorf’s mandate that all communications regarding the
1845 Account should be directed to and made with him, that no bank balance
confirmations should be done on the 1845 Account, and that only Timmerman and . . .
Boe . . . should respond to inquiries regarding the 1845 Account.” CFTC Brief in Support
of the Motion at 22. The second instance occurred in September 2008, when Peregrine
provided a financial statement to U.S. Bank for consideration in connection with the loan
54

documents. A line entry for the 1845 Account listed a balance of $90,135,225, and CFTC
claims this should have alerted U.S. Bank to Wasendorf’s fraud because “the balance in
the 1845 Account never exceeded $54 million.” Id. at 22.15 The third instance occurred
“in May 2011, when Timmerman completed a bank balance confirmation form she
received from the [NFA] for the 1845 Account that incorrectly contained a Wasendorfcontrolled post office box as U.S. Bank’s Cedar Falls branch address.” Id. at 23. After
Wasendorf learned of the balance confirmation, Timmerman sent him the form that she
had received from the NFA, allowing Wasendorf to make a “correction.”
In the U.S. Bank Brief in Support of the Resistance, U.S. Bank argues that “other
facts, unrelated to the withdrawals themselves, should [not] have triggered an obligation
on the part of [U.S. Bank] to investigate Wasendorf.” Id. at 26. For example, when U.S.
Bank reviewed Peregrine’s financial records, “[o]ne of [the] 48 line-items related to the
1845 Account . . . listed a balance of approximately $90,000,000.” Id. U.S. Bank
contends that none of its employees reviewed this reference. With regard to Wasendorf’s
request that U.S. Bank should make all communications regarding the 1845 Account with
him, U.S. Bank states that they would have done so anyway. Finally, U.S. Bank claims
that even if Timmerman had known about the false address in the balance confirmation
request, she would not have necessarily uncovered Wasendorf’s fraud.
ii.

Applicable law

Section 7 of the UFA states that a bank is not liable for the misappropriation of
funds by a fiduciary unless the bank has “actual knowledge that the fiduciary is committing
a breach of his obligation as fiduciary in drawing the check or with knowledge of such
facts that its action in paying the check amounts to bad faith.” UFA § 7. The court now
turns to consider whether a reasonable jury could find that U.S. Bank acted in bad faith.

15

As discussed above, this statement appears to be inaccurate.
55

The UFA does not define “bad faith,” but it defines “in good faith” as “[a] thing
. . . done . . . honestly, whether it be done negligently or not.” Id. § 1(2). The Eighth
Circuit Court of Appeals, in Buffets, Inc. v. Leischow, 732 F.3d 889 (8th Cir. 2013), has
discussed the meaning of “bad faith” under Minnesota law, which mirrors the UFA, and
the court finds that the Eighth Circuit’s reasoning is persuasive. “The UFA is drawn in
terms of specific transactions made in violation of certain fiduciary obligations.” Id. at
899. “The [UFA] provides principals limited protection against a bank’s knowing or badfaith processing of a specific transaction that breaches a fiduciary obligation.” Id. at 900.
“Even if the bank knows that fiduciary obligations apply to some funds in the account,
[potential misappropriations] may not involve those specific funds, so the bank may not
be acting in bad faith in processing any particular transaction.” Id. at 901. However,
“[w]here circumstances suggestive of the fiduciary’s breach become sufficiently obvious
it is ‘bad faith’ to remain passive.” Id. at 902 (quoting Watson Coatings, Inc. v. Am.
Express Travel Related Servs., Inc., 436 F.3d 1036, 1041 (8th Cir. 2006) (internal
quotation marks omitted) (applying Missouri law)). “In other words, the inquiry is into
whether the bank exhibited ‘the deliberate desire to evade knowledge because of a belief
or fear that inquiry would disclose a vice or defect in the transaction, that is to say, . . .
an intentional closing of the eyes or stopping of the ears.’” Id. (quoting Trenton Trust Co.,
599 S.W.2d at 492).
iii.

Application

As an initial matter, the court acknowledges that this is an unusual case, which may
call for a modified approach to the bad faith standard articulated in Buffets, Inc. Although
no U.S. Bank employees claims knowledge that the 1845 Account was a customer
segregated account and certainly did not treat it as such, the 1992 Acknowledgment Letter,
among other things, put U.S. Bank on notice that the 1845 Account was a customer
segregated account. Accordingly, when considering whether U.S. Bank acted in bad faith,
56

the inquiry is whether U.S. Bank or its employees acted in bad faith assuming they knew
the nature of the 1845 Account during the Relevant Period.
The court finds that there is a genuine issue of material fact on whether U.S. Bank
acted with bad faith in facilitating Wasendorf’s withdrawals during the Relevant Period.
For example, on December 1, 2008, Wasendorf Construction’s account, the 0329
Account, had a balance of $7,109.83. On December 5, 2008, a telephonic transfer of
$370,000 was made from the 1845 Account to the 0329 Account. The same day, a check
cleared the 0329 Account in the amount of $371,823.96. No other deposits to the 0329
Account were made during that time. The court finds that a reasonable jury could find that
the circumstances of this transaction made it “sufficiently obvious,” Buffets, Inc., 732
F.3d at 902 (quoting Watson Coatings, Inc., 436 F.3d at 1041) (internal quotation marks
omitted) to U.S. Bank and its employees that Wasendorf may be breaching his fiduciary
duties, assuming they knew of the nature of the 1845 Account. Also, a reasonable jury
could find that U.S. Bank and its employees “exhibited ‘the deliberate desire to evade
knowledge [of fiduciary misappropriation] because of a belief or fear that inquiry would
disclose a vice or defect in the transaction.’” See id. (quoting Trenton Trust Co., 599
S.W.2d at 492).
Moreover, the court finds that a reasonable jury could find that U.S. Bank acted in
bad faith by facilitating the withdrawals and transfers to entities not for the benefit of
Peregrine’s customers after May 13, 2011.

On May 13, 2011, at the request of

Peregrine’s compliance officer, who had no knowledge of the fraud, Timmerman sent an
e-mail to the NFA confirming the balance of the 1845 Account, which accurately reported
the balance as $7,181,336.36. The balance confirmation form Timmerman returned listed
the 1845 Account as a “Customer Segregated Account” and listed U.S. Bank’s address as
P.O. Box 706, the false address that Wasendorf used to intercept mail intended for U.S.
Bank. Wasendorf found out about the confirmation—either from the compliance officer
57

or from Timmerman. Wasendorf then told Timmerman that a mistake had been made in
the confirmation and requested a copy of the balance confirmation form that she had
received from the NFA, which Timmerman provided. The court finds that a reasonable
jury could find that Wasendorf’s request for a balance confirmation form that listed the
1845 Account as a “Customer Segregated Account,” coupled with Wasendorf’s prior
admonishments not to make any account balance confirmations and the false address on
the balance confirmation form, made it “sufficiently obvious,” Buffets, Inc., 732 F.3d at
902 (quoting Watson Coatings, Inc., 436 F.3d at 1041) (internal quotation marks omitted)
to U.S. Bank, through Timmerman, that Wasendorf was breaching his fiduciary duty such
that continuing to facilitate transactions out of the 1845 Account amounted to bad faith.
Also, a reasonable jury could find that after May 13, 2011, U.S. Bank, through
Timmerman, “exhibited ‘the deliberate desire to evade knowledge [of fiduciary
misappropriation] because of a belief or fear that inquiry would disclose a vice or defect
in the [post-May 13, 2011] transaction[s].’” See id. (quoting Trenton Trust Co., 599
S.W.2d at 492).
With regard to other transactions, the court finds that there is a genuine issue of
material fact on which transactions, if any, arose to the level of bad faith. A reasonable
jury could find for either party on many of these transactions and, accordingly, the court
will not invade the province of the jury.
Accordingly, to the extent U.S. Bank argues that the court should grant summary
judgment with respect to whether it violated Section 4d(b) of the Act and Regulation 1.20
by acting in bad faith to facilitate transactions out of the 1845 Account to entities not for
the benefit of Peregrine’s customers, the court shall deny the U.S. Bank Motion. The
court shall also deny the CFTC Motion, because a reasonable jury could find that U.S.
Bank did not act in bad faith with regard to any of the transactions.

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D. Unclean Hands
1.

Parties’ arguments

CFTC argues that the court should grant the CFTC Motion with respect to U.S.
Bank’s affirmative defense of unclean hands. CFTC contends:
U.S. Bank has now completed extensive discovery, taking
numerous depositions, including seven CFTC Fed. R. Civ. P.
30(b)(6) witnesses on 19 different topics, requesting and
receiving almost three million documents from . . . CFTC
dating back to 1992, and serving and receiving responses to 22
interrogatories, 35 document requests, and 27 requests to
admit. However, U.S. Bank still has no credible evidence to
support its unclean hands affirmative defense because none
exists.
CFTC Brief in Support of the Motion at 26. CFTC asserts that many courts have held that
the affirmative defense of unclean hands against a government agency in an enforcement
action is unavailable, and when the affirmative defense of unclean hands is permitted in
an enforcement action against the government, it, at a minimum, requires “that a defendant
allege that the government acted in bad faith.” Id. CFTC also contends that “courts only
permit an unclean hands defense where the government’s alleged misconduct is ‘egregious’
and results in ‘extreme prejudice’ that rises to the ‘constitutional level’ and is ‘established
through a direct nexus between the misconduct and the constitutional injury.’” Id. at 27
(quoting SEC v. Cuban, 798 F. Supp. 2d 783, 792 (N.D. Tex. 2011)). CFTC argues that
U.S. Bank has not shown any such conduct and, therefore, the court should grant the
CFTC Motion with respect to U.S. Bank’s affirmative defense of unclean hands.
U.S. Bank argues that whether CFTC exhibited sufficiently “unclean hands” is a
factual issue that is not appropriate to resolve on summary judgment. Specifically, U.S.
Bank claims that in the late 1990s, CFTC became aware of “red flags” relating to
Peregrine’s conduct. See Eric Juzenas Deposition, U.S. Bank Resistance App’x at 49-50.
Among these “red flags” was CFTC’s belief that it had been misled by Peregrine with
59

regard to accounting issues. Id. at 50. U.S. Bank notes that a 1999 CFTC audit of
Peregrine contained the following findings:
In apparent violation of Section 18 U.S.C. 1001 [Peregrine]
filed a March 26, 1999 Form 1-FR-FCM which included
intentional misstatements and omissions. In addition, oral
responses provide by [Peregrine] appeared to be provided as
an attempt to mislead the audit process.
During the audit several questionable accounts were discussed
with [Peregrine]. On several occasions the initial response
was later altered and amended. It appeared that [Peregrine]
was in search of the best response based on capital
requirements instead of the accurate or correct response. In
other cases it became apparent that [Peregrine] had no
justification to support the treatment of account balances.
1999 CFTC Audit, U.S. Bank Resistance App’x at 672. U.S. Bank argues that: (1) these
findings; (2) CFTC’s recommendation in the 1999 CFTC Audit that Peregrine “be issued
a warning letter for the violations noted above . . . [and] that the findings of this audit be
referred to the Division of Enforcement for appropriate action,” id. at 676; (3) no action
being taken against Peregrine despite Peregrine’s violation of criminal law; and (4) CFTC
not implementing any special procedures to monitor Peregrine or conducting another audit
until 2007, which was a limited audit, demonstrate that CFTC had unclean hands with
respect to this enforcement action against U.S. Bank. U.S. Bank Brief in Support of the
Resistance at 32-33.
U.S. Bank claims it was prejudiced by CFTC’s inaction because “[t]he customer
losses sought by . . . CFTC were incurred because . . . CFTC decided to allow
[Peregrine’s] conduct to continue.” Id. at 34. Therefore, U.S. Bank argues, CFTC’s
“claims against U.S. Bank . . . arose directly from its own misconduct.” Id.

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2.

Applicable law

“One who seeks equitable relief must approach the court with clean hands.” Earle
A. Hanson & Assocs. v. Farmers Coop. Creamery Co., 403 F.2d 65, 70 (8th Cir. 1968).
If one comes to court “tainted with inequitableness or bad faith relative to the matter in
which he [or she] seeks relief, however improper may have been the behavior of the
defendant,” the court may decline to provide relief. Precision Instrument Mfg. Co. v.
Auto. Maint. Mach. Co., 324 U.S. 806, 814 (1945). The unclean litigant’s conduct “need
not necessarily have been of such a nature as to be punishable as a crime or as to justify
legal proceedings of any character.” Id. at 815. Instead, “[a]ny willful act concerning the
cause of action which rightfully can be said to transgress equitable standards of conduct
is sufficient cause” for the court to deny relief based on a litigant’s unclean hands. Id.
However, the court has a “wide range” of discretion when considering whether to deny
relief to a litigant with unclean hands. Id.
“It is well established that the United States is subject to general principles of equity
when seeking an equitable remedy.” United States v. Wilson, 707 F.2d 304, 312 (8th Cir.
1982) (per curiam); see also Second Nat’l Bank of N. Miami, 502 F.2d 535, 548 (5th Cir.
1974) (“Certainly when seeking an equitable remedy the United States is no more immune
to the general principles of equity than any other litigant.”). Although the United States
is subject to the general principles of equity, the Supreme Court has stated that equitable
principles “will not be applied to frustrate the purpose of [the United States’] laws or to
thwart public policy.” Pan-Am. Petroleum & Transp. Co. v. United States, 273 U.S. 456,
506 (1927). In announcing this principle, the Supreme Court cited numerous cases that
forgave a mistake by the government—for example, failing to join a necessary party,
Heckman v. United States, 224 U.S. 413 (1912), or failing to offer to return the
consideration from an allegedly unlawful contract, Causey v. United States, 240 U.S. 399
(1916)—because not doing so would frustrate congressional policy. Pan-Am. Petroleum

61

& Transp. Co., 273 U.S. at 506-10. These cases, however, did not specifically address
the application of the equitable principle of unclean hands to a government enforcement
action.

That is, these cases, and the holding in Pan-American Petroleum &

Transportation, Co. itself, did not consider whether the United States, acting in the public
interest, was immune to an affirmative defense that it had unclean hands in relation to the
dispute.
The court is aware of only one Circuit Court of Appeals—the Fifth Circuit—that has
addressed whether a defendant may assert the affirmative defense of unclean hands against
the government in an enforcement action in support of the public interest. In Second
National Bank of North Miami, 502 F.2d 535 (5th Cir. 1974), the defendant asserted that
the United States was not entitled to relief because the IRS agents involved in the case had
unclean hands. Second Nat’l Bank of N. Miami, 502 F.2d at 547-48. The Fifth Circuit
Court of Appeals acknowledged the principles of Pan-American Petroleum &
Transportation Co. and cited with approval the Tenth Circuit’s “good faith” standard,16
concluding that “‘unless the Government did something which in good conscience it should
not have done, or failed to do something fair dealing required it to do, it comes into court

16

In Deseret Apartments, Inc. v. United States, 250 F.2d 457 (10th Cir. 1957), the
United States, acting on behalf of the Federal Housing Commissioner, sued to foreclose
the mortgage of Deseret Apartments, Inc. (“Deseret”). Id. at 458. The district court
granted the United States a deficiency judgment, and Deseret appealed, arguing that the
Tenth Circuit should overturn the district court’s judgment because the government came
into court with unclean hands. Deseret argued that it relied on a certificate of necessity
issued by the Secretary of the Army in determining whether to construct the units and that,
in fact, there was no need for the units. The Tenth Circuit concluded that “[t]he record
is devoid of any facts showing bad faith on the part of the Government officials in
executing the certificate or facts which would support a conclusion that the Government
failed to do anything it should not have done.” Id. at 459. Accordingly, the Tenth Circuit
concluded that because the Government acted in good faith, it is “absolve[d] [from] all
conduct which would sully the Government’s hands and prevent it from coming into a
court of equity to seek an enforcement of its rights.” Id.
62

with clean hands and is entitled to . . . equitable relief.’” Id. at 548 (quoting Deseret
Apartments, Inc., 250 F.2d at 458). The Fifth Circuit held that the “United States acted
with sufficient good faith” and that its “conduct [was] insufficiently malignant” and,
consequently, granted the United States equitable relief.17
Several federal district courts have addressed whether a party may assert the
affirmative defense of unclean hands against the government in an enforcement action
pursuant to the public interest, including in the Eighth Circuit. In United States ex rel.
Zissler v. Regents of the Univ. of Minn., 992 F. Supp. 1097 (D. Minn. 1998), the court
suggested that an unclean hands defense may be available but stated that the government’s
actions did not “‘transgress equitable standards.’”

Id. at 1114 (quoting Precision

Instruments Mfg. Co., 324 U.S. at 815). In EEOC v. Hibbing Taconite Co., 266 F.R.D.
260 (D. Minn. 2009), the Equal Employment Opportunity Commission (“EEOC”) alleged
that Hibbing Taconite Co. (“Hibbing”) discriminated against an employee and requested,
among other things, that the court require Hibbing “carry out policies, practices, and
programs[] for equal employment opportunities, so as to eradicate the effects of any past
or present unlawful employment practices.” Id. at 263. The court declined to “determine
whether a defense of unclean hands should be unavailable, as a matter of law, against the
EEOC in its public capacity,” because Hibbing did not adequately plead the elements of
an unclean hands defense. Id. at 270. Accordingly, the court is not aware of any federal
court in the Eighth Circuit that has concluded, as a matter of law, that an unclean hands

17

The First Circuit Court of Appeals also equates unclean hands to bad faith and,
accordingly, requires litigants to show that the government acted with bad faith when
asserting the unclean hands defense. Texaco Puerto Rico, Inc. v. Dep’t of Consumer
Affairs, 60 F.3d 867, 880 (1st Cir. 1995). However, Texaco Puerto Rico, Inc., as with
Deseret Apartments, Inc., was not in the context of a government enforcement action
pursuant to a congressional mandate to serve the public interest and, therefore, these cases
are less persuasive than Second National Bank of North Miami.
63

defense is unavailable against the government in an enforcement action pursuant to the
public interest.
However, other federal district courts across the country are divided on the issue.
Some courts cite Pan-American Petroleum & Transportation Co. and Second National
Bank of North Miami for the proposition that a litigant can never invoke an unclean hands
defense against the government in an enforcement action. Other courts deny motions to
strike an unclean hands defense and allow the factual record to develop. Compare, United
States v. Philip Morris Inc., 300 F. Supp. 2d 61, 75 (D.D.C. 2004) (“When, as here, the
Government acts in the public interest[,] the unclean hands doctrine is unavailable as a
matter of law.”), and United States v. Am. Elec. Power Serv. Corp., 218 F. Supp. 2d 931,
938 (S.D. Ohio 2002) (granting the United States’ motion to strike an unclean hands
defense because this defense “may not be used against the United States to prevent it from
enforcing its laws to protect the public interest”), and SEC v. Hayes, 1991 WL 236846,
at *2 (N.D. Tex. July 25, 1991) (striking an unclean hands defense because it was “clearly
without merit because it may not be invoked against a governmental agency which is
attempting to enforce a congressional mandate in the public interest”), with SEC v.
Nacchio, 438 F. Supp. 2d 1266, 1287-88 (D. Colo. 2006) (concluding that whether the
facts in the case justify an unclean hands defense “cannot be adjudicated on the face of the
pleadings, and must therefore await development of a more complete factual record”), and
SEC v. Downe, 1994 WL 67826, at *1-2 (S.D.N.Y. Mar. 3, 1994) (same).
“Where courts have permitted equitable defenses to be raised against the
government, they have required that the agency’s misconduct be egregious and the
resulting prejudice to the defendant rise to a constitutional level.” Cuban, 798 F. Supp.
2d at 792 (quoting SEC v. Elecs. Warehouse, Inc., 689 F. Supp. 53, 73 (D. Conn. 1988))
(internal quotation marks omitted). “Moreover, courts have permitted the defense only
where the alleged misconduct occurred during the investigation leading to the suit and the

64

misconduct prejudiced the defendant in his defense of the action.” Id. (quoting Elecs.
Warehouse, Inc., 689 F. Supp. at 73) (internal quotation marks omitted).
3.

Application

The court finds that an affirmative defense of unclean hands is unavailable against
the government in an enforcement action in the public interest. See Pan-Am. Petroleum
& Transp. Co., 273 U.S. at 506 (“The general principles of equity . . . will not be applied
to frustrate the purpose of [the United States’s] laws or to thwart public policy.”); see also
Philip Morris Inc., 300 F. Supp. 2d at 75 (“When, as here, the Government acts in the
public interest[,] the unclean hands doctrine is unavailable as a matter of law.”); Am. Elec.
Power Serv. Corp., 218 F. Supp. 2d at 938 (granting the United States’ motion to strike
an unclean hands defense because this defense “may not be used against the United States
to prevent it from enforcing its laws to protect the public interest”); Hayes, 1991 WL
236846, at *2 (striking an unclean hands defense because it was “clearly without merit
because it may not be invoked against a governmental agency which is attempting to
enforce a congressional mandate in the public interest”). Although the 1999 CFTC Audit
should have led CFTC to monitor Wasendorf’s activities more closely, their failure to
detect Wasendorf’s fraud should not prevent it from enforcing potential violations of the
Act and the Regulations by U.S. Bank. The public has an important interest in the
enforcement of federal laws and regulations. Preventing them from being so enforced in
the event that an agency fails to execute its duties would essentially absolve potential
lawbreakers from liability.
Even if the court were to recognize an affirmative defense of unclean hands against
the government in an enforcement action in the public interest, U.S. Bank has not shown
that CFTC’s actions or inactions meet the “exacting standard” and “strictly limiting
circumstances” that courts have required [before finding] that the government had unclean
hands. See Cuban, 798 F. Supp. 2d at 790, 792 (collecting cases). U.S. Bank has not

65

established a genuine issue of material fact as to whether the violation and the prejudice
rose to a “constitutional level,” id. at 792 (quoting Elecs. Warehouse, Inc., 689 F. Supp.
at 73) (internal quotation marks omitted), or whether any alleged unclean hands on the part
of CFTC prejudiced U.S. Bank in its defense of this action. U.S. Bank may still argue,
as it does, that it did not intend for the 1845 Account to be subject to the Guaranties and
that it did not facilitate any transactions out of the 1845 Account in bad faith. Nothing
CFTC has done—or did not do—limits these defenses.
Accordingly, the court shall grant the CFTC Motion to the extent it requests that
the court grant summary judgment to CFTC with respect to U.S. Bank’s affirmative
defense of unclean hands.
E. Remedies
1.

CFTC Motion

In the CFTC Motion, CFTC requests that the court grant the following remedies:
(1) a permanent injunction enjoining U.S. Bank from future violations of Section 4d(b) of
the Act and Regulation 1.20(a); (2) civil monetary penalties; (3) restitution to customers
who have sustained losses; and (4) disgorgement of all gains U.S. Bank received in
connection with alleged violations of the Act and the Regulations. Because there are
genuine issues of material fact as to whether U.S. Bank violated the Act and the
Regulations, the CFTC Motion shall be denied to the extent it requests that the court grant
CFTC the remedies it seeks.
2.

U.S. Bank Motion

In the U.S. Bank Motion, U.S. Bank argues that it “is entitled to summary judgment
with respect to . . . CFTC’s restitution claim.” U.S. Bank Brief in Support of Motion at
38. U.S. Bank contends that restitution under 7 U.S.C. § 13a-1(d)(3) may be awarded to
remedy “ill-gotten gain.” Id. (quoting CFTC v. Wilson, No. 12-11799-RG3, 2014 WL
1979866, at *9 n.16 (D. Mass. May 16, 2014)). U.S. Bank contends that “CFTC has

66

recognized that restitution for Wasendorf’s fraud is properly sought from the person who
committed and benefited from the fraud—Wasendorf himself” and that it is improper to
award “restitution of funds from U.S. Bank that [it] never received.” Id. at 39. U.S.
Bank does admit that it received “interest and fees it collected from the accounts
maintained by Wasendorf and [Peregrine] at [U.S. Bank]” and that it received
“$323,784.24 in interest from the [L]oans made to Wasendorf Construction and Wasendorf
personally,” but it contends that “[t]hat amount pales in comparison with the loss of
$6,662,503.38 that [U.S. Bank] suffered as a result of Wasendorf’s failure to repay the
Wasendorf Construction loan.” Id. at 40.18
CFTC argues that “U.S. Bank omits from its restitution discussion the portions of
Section 6c(3)(A) of the Act that address customer losses,” which was amended in 2011.
CFTC Resistance at 19. CFTC asserts that this amended section makes $35,665,995.40,
“Peregrine’s customer losses proximately caused by U.S. Bank , . . . the appropriate
amount of restitution.” Id.
7 U.S.C. § 13a-1(d)(3) states that CFTC “may seek, and the court may impose, on
a proper showing, . . . equitable remedies including—(A) restitution to persons who have
sustained losses proximately caused by such violation (in the amount of such losses).” 7
U.S.C. § 13a-1(d)(3).19

18

U.S. Bank appears to be taking inconsistent positions in the U.S. Bank Brief in
Support of the Motion and the U.S. Bank Brief in Support of the Resistance. In the
former, U.S. Bank states that CFTC is not entitled to restitution because U.S. Bank’s
losses from the Peregrine/Wasendorf relationship exceeded its gains. See id. However,
in the latter, it says that “the [Act] make[s] clear that a defendant’s gain for restitution
purposes should disregard what the defendant lost after taking customer money.” U.S.
Bank Brief in Support of the Resistance at 39.
19

Although the jury will determine if and when U.S. Bank violated the Act and the
Regulations, the court will determine the appropriate remedy in accordance with 7 U.S.C.
(continued...)
67

Based on the plain language of the statute, CFTC is entitled to seek restitution for
the customers’ losses proximately caused by U.S. Bank. Accordingly, the court shall deny
the U.S. Bank Motion to the extent it requests that the court grant summary judgment to
U.S. Bank with respect to CFTC’s request for restitution.
VII. CONCLUSION
In light of the foregoing, Plaintiff United States Commodity Futures Trading
Commission’s Motion for Summary Judgment (docket no. 77) is GRANTED IN PART
and DENIED IN PART as follows:
(1)

The court GRANTS the CFTC Motion to the extent it argues that U.S. Bank
may not pursue the affirmative defense of unclean hands.

(2)

The court DENIES the CFTC Motion with respect to its other arguments.

Defendant U.S. Bank N.A.’s Motion for Summary Judgment (docket no. 80) is
GRANTED IN PART and DENIED IN PART as follows:
(1)

The court GRANTS the U.S. Bank Motion to the extent it argues that U.S.
Bank did not improperly “use” the customer funds, thereby violating the Act
and the Regulations, by considering them when deciding whether to issue the
Loans.

(2)

The court DENIES the U.S. Bank Motion with respect to its other
arguments.

IT IS SO ORDERED.

19

(...continued)
§ 13a-1.
68

DATED this 19th day of November, 2014.

69