US Commodity Futures Trading Commission v. US Bank, NA

Filing 18

ORDER denying 10 Motion to Dismiss. Signed by Chief Judge Linda R Reade on 11/5/2013. (pac)

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

13-CV-2041-LRR

vs.

ORDER

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

INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

II.

PROCEDURAL HISTORY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

III.

SUBJECT MATTER JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . 3

IV.

STANDARD OF REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

V.

FACTUAL BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A.
B.

VI.

Parties.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Overview of the Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.
The 1845 Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.
Loans to the Wasendorfs and Wasendorf Construction, L.L.C.. . .7
3.
Transfers from the 1845 Account . . . . . . . . . . . . . . . . . . . . . .9
4.
Relief requested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ANALYSIS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
A.

B.

C.

Written Acknowledgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.
Parties’ arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.
Applicable law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
3.
Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Applicability of the 2008 and 2011 Guaranties to the 1845 Account . . . 14
1.
Parties’ arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
2.
Applicable law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
3.
Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Alleged Improper Use and Holding of the 1845 Account . . . . . . . . . . 18
1.
Applicable law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

2.

D.

E.

VII.

Alleged improper use of the 1845 Account . . . . . . . . . . . . . . . .19
a.
Parties’ arguments . . . . . . . . . . . . . . . . . . . . . . . . . . .19
b.
Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
3.
Alleged improper holding of the 1845 Account . . . . . . . . . . . . 23
a.
Parties’ arguments . . . . . . . . . . . . . . . . . . . . . . . . . . .23
b.
Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
1.
Parties’ arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.
Applicable law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
3.
Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Disgorgement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
1.
Parties’ arguments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
2.
Applicable law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.
Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
I. INTRODUCTION
The matter before the court is Defendant U.S. Bank, N.A.’s (“U.S. Bank”) Motion

to Dismiss (“Motion”) (docket no. 10).
II. PROCEDURAL HISTORY
On June 5, 2013, Plaintiff United States Commodity Futures Trading Commission
(“Commission”) 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) 17
C.F.R. § 1.20(a). On August 5, 2013, U.S. Bank filed the Motion. On August 15, 2013,
the Commission filed its Resistance (docket no. 13). On August 28, 2013, U.S. Bank filed
its Reply (docket no. 14). On August 26, 2013, the Commission filed a Supplement to the
Resistance (docket no. 15).
In the Motion, U.S. Bank requests the opportunity to present oral argument. The
court finds that oral argument is unnecessary. The Motion is fully submitted and ready for
decision.

2

III. SUBJECT MATTER JURISDICTION
The court has federal question jurisdiction over the Commission’s claims against
U.S. Bank, which arise under 7 U.S.C. § 6d(b) and 17 C.F.R. § 1.20(a). 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. STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(6) provides for dismissal on the basis of a
“failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). To
survive a Rule 12(b)(6) motion to dismiss, “a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007)); accord B & B Hardware, Inc. v. Hargis Indus., Inc., 569 F.3d 383, 387 (8th
Cir. 2009). A claim satisfies the plausibility standard “when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Iqbal, 556 U.S. at 678. “The plausibility standard is not
akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a
defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S. at 556).
Although a plaintiff need not provide “detailed” facts in support of its allegations,
id. (quoting Twombly, 550 U.S. at 555), the “short and plain statement” requirement of
Federal Rule of Civil Procedure 8(a)(2) “demands more than an unadorned” accusation
of harm, id.; see also Erickson v. Pardus, 551 U.S. 89, 93 (2007) (“Specific facts are not
necessary [under Rule 8(a)(2)].”). “A pleading that offers ‘labels and conclusions’ or ‘a
formulaic recitation of the elements of a cause of action will not do.’” Iqbal, 556 U.S. at
678 (quoting Twombly, 550 U.S. at 555). “Where the allegations show on the face of the
complaint [that] there is some insuperable bar to relief, dismissal under Rule 12(b)(6) is
appropriate.” Benton v. Merrill Lynch & Co., 524 F.3d 866, 870 (8th Cir. 2008).

3

V. FACTUAL BACKGROUND
Viewed in the light most favorable to the Commission, the facts are as follows:
A. Parties
The Commission is “an independent federal regulatory agency charged by Congress
with the administration and enforcement of the Act and the Regulations thereunder.”
Complaint ¶ 7.
U.S. Bank “is a nationally chartered bank with its principal place of business in
Minneapolis, Minnesota.” Id. ¶ 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.
B. Overview of the Dispute
1.

The 1845 Account

Russell Wasendorf, Sr.1 incorporated Peregrine Financial Group, Inc. (“Peregrine”)
in 1990.

In January 1992, Peregrine registered as a futures commission merchant

(“FCM”) with the Commission. Wasendorf, who was the Chief Executive Officer of
Peregrine from its inception, registered with the Commission as an associated person
(“AP”) of Peregrine in 1992.
An FCM is an entity “that . . . is . . . engaged in soliciting or in accepting orders
for . . . the purchase or sale of a commodity for future delivery . . . [and] in connection
with [such activities], accepts any money, securities, or property (or extends credit in lieu
thereof) to margin, guarantee, or secure any trades or contracts that result or may result
therefrom . . . or . . . that is registered with the Commission as a [FCM].” 7 U.S.C.
§ 1a(28). As an FCM, Peregrine was required to keep its customers’ funds in a customer

1

For ease of reading, the court will refer to Russell Wasendorf, Sr. as
“Wasendorf.” The court will retain the full names of other members of Wasendorf’s
family.
4

segregated account (“CSA”), which “[is] designed to ensure that customer funds are
protected and available for immediate withdrawal or transfer, even if [Peregrine]
experiences financial distress or enters into bankruptcy.” Complaint ¶ 15.
In August 1992, Wasendorf, as Peregrine’s AP, placed one of Peregrine’s CSAs,
the 1845 Account,2 with a depository bank, Firstar Corporation (“Firstar”). 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. When U.S. Bank took
control of the 1845 Account, Peregrine notified U.S. Bank that the 1845 Account was a
Commodity Exchange Act CSA. In addition, bank records and related documents referred
to the 1845 Account as Customer Segregated Funds or something similar.3 While U.S.
Bank was the depository of the 1845 Account, Banker A, an Assistant Relationship
Manager, was the employee with primary responsibility of managing U.S. Bank’s
relationship with Wasendorf and Peregrine.
In the course of its business, Peregrine instructed its customers to send checks to
fund CSAs to an Iowa or Illinois address. The checks that customers sent to Peregrine in
Iowa were usually deposited in U.S. Bank’s Cedar Falls branch and personally processed
by Banker A. Such checks were labeled “Peregrine Financial Group, Inc. Customer
Segregated Account.” Id. ¶ 27.
Among Peregrine employees, Wasendorf made certain he alone had access to and
information about the 1845 Account. In fact, Wasendorf told U.S. Bank that he alone

2

The account number ended with 1845 and, therefore, the court shall refer to it as
the “1845 Account” for ease of reading.
3

For example, the account was titled: “CEA Customer Segregated Accounts” on
the bank’s internal computer systems; “Peregrine Financial Group, Inc. Segregated Funds
Account” on a August 2000 bank statement; “Firstar/U.S. Bank Customer Seg Account”
on a August 2004 financial statement; and “PFG Customer Segregated Funds Account”
in bank correspondence in August 1999. See Complaint ¶¶ 37-40.
5

should receive communications regarding the 1845 Account. To fulfill Wasendorf’s
request, U.S. Bank noted in its internal computer system that no account balance
confirmations on the 1845 Account were allowed and that any inquiries about the 1845
Account had to be directed to Banker A or the Relationship Manager.
Over the course of two decades, Wasendorf defrauded over 24,000 of Peregrine’s
customers by misappropriating over $215 million in customer funds from the 1845
Account. He accomplished this by renting a post office box in Cedar Falls, which he set
up to appear to be a U.S. Bank address. At the post office, Wasendorf intercepted mail
that the National Futures Association (“NFA”)4 and Peregrine’s auditor intended to send
to U.S. Bank. After receiving the mail, Wasendorf used Photoshop and inkjet printers to
alter the bank statements for the 1845 Account, and then sent the altered bank statements
to the NFA and Peregrine’s auditor. In so doing, Wasendorf was able to conceal his fraud
from the NFA, Peregrine’s auditor and federal regulators.
Aside from the 1845 Account, U.S. Bank maintained over thirty additional accounts
with entities and individuals affiliated with Wasendorf and Peregrine. Among these
accounts were accounts for Wasendorf’s other companies, including: Wasendorf Air,
L.L.C. (company created to hold title to Wasendorf’s private airplane), Wasendorf &
Associates, Inc. (research and publishing firm), My Verona, L.L.C. (Cedar Falls
restaurant) and Traders Press, Inc. (publishing company).
In May 2011, U.S. Bank received a balance confirmation request from the NFA and
confirmed that the 1845 Account only held $7.1 million. After returning the form to the
NFA, Banker A informed Wasendorf of the confirmation form and provided Wasendorf
with a copy of the form. Wasendorf then sent a falsified form to the NFA that stated that
the balance of the 1845 Account was $218,650,550.

4

On July 9, 2012, as federal

The NFA is the self-regulatory agency for the United States’ derivatives industry.
6

authorities were about to discover his fraud, Wasendorf attempted suicide and left a note
admitting his fraudulent behavior.
On September 14, 2012, the government filed an Information charging Wasendorf
with mail fraud (Count I), embezzlement of customer funds (Count II), making false
statements to the Commission (Count III) and making false statements to the NFA (Count
IV). See United States v. Wasendorf, No. 12-CR-2021-LRR (N.D. Iowa Sept. 14, 2012),
Information (docket no. 18). On September 17, 2012, Wasendorf pled guilty before
United States Chief Magistrate Judge Jon S. Scoles to each count in the Information. See
id., Minute Entry (docket no. 28). On October 3, 2012, the undersigned accepted
Wasendorf’s guilty plea. See id., Order (docket no. 35). On January 31, 2013, the court
sentenced Wasendorf to fifty years in prison and ordered that he pay over $215 million in
restitution. See id., Judgment (docket no. 70).
2.

Loans to the Wasendorfs and Wasendorf Construction, L.L.C.

On September 9, 2008, U.S. Bank issued Wasendorf and his wife, Connie
Wasendorf, a $3 million loan (“Wasendorfs’ loan”). On that same day, Wasendorf, on
Peregrine’s behalf, guaranteed the Wasendorfs’ loan (“2008 Guaranty”). The 2008
Guaranty stated, inter alia:
[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 [the 2008 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 [the 2008 Guaranty], and grants
[U.S. Bank] a contractual right to set off . . . 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 . . . .

7

2008 Guaranty (docket no. 10-3) at 4. Among Peregrine’s accounts at U.S. Bank, the
1845 Account had the largest balance. In January 2010, the Wasendorfs and U.S. Bank
agreed to extend the maturity date of the Wasendorfs’ loan. Wasendorf signed an amended
agreement on behalf of Peregrine and, in doing so, Peregrine guaranteed the Wasendorfs’
loan. Peregrine served as the guarantor on the Wasendorfs’ loan from September 9, 2008
until the loan was paid off in February 2010. During this period, U.S. Bank collected
approximately $29,000 in interest on the Wasendorfs’ loan.
On September 10, 2008, U.S. Bank issued Wasendorf Construction, L.L.C.
(“Construction”), a company formed on July 18, 2007 and owned by Wasendorf and his
son, Russell Wasendorf, Jr., a loan for $6.4 million dollars (“Construction loan”).
Construction applied for the loan to build an office building in Cedar Falls, Iowa, with
Peregrine to be the building’s primary tenant. On August 5, 2011, Wasendorf, on behalf
of Peregrine, guaranteed the Construction loan (“2011 Guaranty”). The 2011 Guaranty
stated, inter alia:
[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 [the 2011 Guaranty]. [Peregrine] hereby
authorizes [U.S. Bank], without further notice to anyone, to
charge any account of [the Guarantor] for the amount of any
and all Obligations due under [the 2011 Guaranty], and grants
[U.S. Bank] a contractual right to set off . . . 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 . . . .
2011 Guaranty (docket no. 10-4) at 3-4. Peregrine served as the guarantor on the
Construction loan from August 2011 to July 2012. During this period, U.S. Bank
collected approximately $290,000 in interest on the Construction loan. On December 13,

8

2012, U.S. Bank filed a claim in Peregrine’s bankruptcy proceedings for the
$6,662,505.38 outstanding on the Construction loan.
3.

Transfers from the 1845 Account

From June 2008 to June 2012, approximately $118 million was deposited into the
1845 Account and approximately 94% of this money was from Peregrine’s customers.5
In this same period, Wasendorf transferred approximately $35 million from the 1845
Account to himself, his companies and Connie Wasendorf, including approximately $10.5
million to Construction; $13.5 million to Wasendorf & Associates, Inc.; $5 million to My
Verona, L.L.C.; $1.1 million to Wasendorf Air, L.L.C.; $2.5 million to Wasendorf
personally; and $2.5 million to Connie Wasendorf as part of a divorce settlement.
4.

Relief requested

In light of U.S. Bank’s alleged wrongdoing, the Commission requests that the court
grant relief pursuant to 7 U.S.C. § 13a-1, including: (1) finding that U.S. Bank violated
7 U.S.C. § 6d(b) and 17 C.F.R. § 1.20(a); (2) issuing a permanent injunction prohibiting
U.S. Bank or affiliated entities from violating 7 U.S.C. § 6d(b) and 17 C.F.R. § 1.20(a);
(3) requiring that U.S. Bank make full restitution to any Peregrine customer harmed by its
actions; (4) requiring that U.S. Bank disgorge all benefits conferred to U.S. Bank from its
alleged wrongdoing; (5) requiring U.S. Bank to pay civil monetary penalties under the
Act; (6) requiring U.S. Bank to pay costs and fees; (7) and providing any other relief that
the court deems necessary and appropriate.

5

As discussed in detail below, federal regulations also permitted Peregrine to
deposit funds into the CSA. Peregrine’s funds accounted for the remaining 6% of the
funds in the 1845 Account.
9

VI. ANALYSIS
The parties dispute whether U.S. Bank violated federal law in its handling of the
1845 Account. The laws and regulations at issue are 7 U.S.C. § 6d(b) and 17 C.F.R.
§ 1.20(a). 7 U.S.C. § 6d(b) provides: “It shall be unlawful for . . . any depository, that
has received any money, securities, or property for deposit in a separate account . . . to
hold . . . or use any such money, securities, or property as belonging to the depositing
[FCM] or any person other than the customers of such [FCM].” Id.; see also 17 C.F.R.
§ 1.20(a) (“Under no circumstances shall any portion of futures customer funds be
obligated to . . . any depository except to purchase, margin, guarantee, secure, transfer,
adjust or settle trades, contracts or commodity option transactions of futures customers.
No person, including any . . . depository, that has received futures customer funds for
deposit in a segregated account . . . may hold . . . or use any such funds as belonging to
any person other than the futures customers of the [FCM] which deposited such funds.”).
The Commission asserts in Count I that U.S. Bank violated 7 U.S.C. § 6d(b) and
17 C.F.R. § 1.20(a) by improperly using CSA funds when U.S. Bank allegedly used the
1845 Account to secure the $3 million Wasendorfs’ loan and the $6.4 million Construction
loan in 2008 and 2011, respectively. The Commission asserts in Count II that U.S. Bank
violated the same provisions by improperly holding customer funds when U.S. Bank
allegedly allowed Wasendorf to transfer money from the 1845 Account to himself, his
various companies and Connie Wasendorf. The Commission argues that neither the way
U.S. Bank used CSA funds nor held such funds in the 1845 Account was for the benefit
of Peregrine’s customers, as required by 7 U.S.C. § 6d(b).
In the Motion, U.S. Bank asserts that the Commission has failed to state a claim for
which relief may be granted and, thus, that the court should dismiss Counts I and II.
Specifically, U.S. Bank first argues that the Act and its regulations do not apply to U.S.
Bank because Peregrine failed to obtain a written acknowledgment that indicated U.S.

10

Bank verified the 1845 Account was a CSA. Second, U.S. Bank argues that it did not
improperly “use” or “hold” any of the funds in the 1845 Account. Third, U.S. Bank
argues that, even if the court does not dismiss the Commission’s claims under U.S. Bank’s
first two arguments, the court should dismiss the Commission’s request for restitution
because any alleged wrongdoing on the part of U.S. Bank did not proximately cause
Peregrine’s customers to suffer losses. Fourth, U.S. Bank argues that the court should
dismiss the Commission’s request for disgorgement because U.S. Bank did not gain
anything from the alleged violations.
A. Written Acknowledgment
1.

Parties’ arguments

U.S. Bank asserts that the Commission failed to allege that Peregrine ever requested
that U.S. Bank provide a written acknowledgment that the 1845 Account was subject to
the Act. U.S. Bank also asserts that the Commission failed to allege that Peregrine
obtained and retained such acknowledgment.

Thus, according to U.S. Bank, the

Commission made no allegations that showed that U.S. Bank was required to comply with
the Act and its regulations. In support of its argument, U.S. Bank relies on several of the
Commission’s interpretative letters and notices of proposed rulemaking that it claims
support its position of “the mandatory nature of a depository acknowledgment letter.”
Brief in Support of Motion (docket no. 10-11) at 20.
In its Resistance, the Commission first argues that it will show at trial that U.S.
Bank provided Peregrine an acknowledgment letter. Second, the Commission argues that,
even if U.S. Bank did not issue an acknowledgment letter, the absence of an
acknowledgment letter is not dispositive of the issue of whether U.S. Bank was required
to comply with the Act and its regulations. In support of its second argument, the
Commission states that while the regulations contain a requirement that an FCM
(Peregrine) obtain a written acknowledgment from a depository (U.S. Bank) that the

11

depository understands the CSA is subject to the Act, nothing in the Act requires a bank
to issue a written acknowledgment as a prerequisite to it being subject to the Act and its
regulations. The Commission asserts that the Complaint referenced multiple instances in
which Peregrine notified U.S. Bank, both verbally and in writing, that the 1845 Account
was a CSA, subjecting U.S. Bank to liability if it violated the Act.
2.

Applicable law

7 U.S.C. § 6d(b) provides: “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
[FCM] or any person other than the customers of such [FCM].” Id. Pursuant to 17
C.F.R. § 1.20(a), Peregrine was required to “obtain and retain in its files . . . a written
acknowledgment from [U.S. Bank] . . . that it was informed that the futures customer
funds deposited therein are those of futures customers and are being held in accordance
with the provisions of the Act [and the regulations].” See 17 C.F.R. § 1.20(a).
3.

Application

The court is not persuaded by U.S. Bank’s argument that it is not subject to the Act
and its regulations because the Complaint did not specifically allege that U.S. Bank issued
a written acknowledgment indicating that the 1845 Account was a CSA. As an initial
matter, the court notes that the parties dispute whether U.S. Bank issuing a written
acknowledgment is a prerequisite to it being subject to the Act and the regulations.
However, the court need not resolve this issue at this time because the court finds that the
Complaint, even without a specific reference to an acknowledgment letter, has “[pled]
factual content that allows the court to draw the reasonable inference that [U.S. Bank] is
liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. The plain language of 7
U.S.C. § 6d(b) prohibits particular actions by a depository if a depository receives money
in the form of a CSA. See 7 U.S.C. § 6d(b) (“It shall be unlawful for . . . any depository,

12

that has received any money, securities, or property for deposit in a separate account . . .
to hold . . . or use any such money, securities, or property as belonging to the depositing
[FCM] or any person other than the customers of such [FCM].”).
In the Complaint, the Commission states that “U.S. Bank cannot locate any account
opening documentation or signature cards for the 1845 Account” despite U.S. Bank
retaining this information for all of the other accounts that Wasendorf and Peregrine had
at U.S. Bank. Complaint ¶ 31. Additionally, the Commission states that the account was
labeled as a CSA in numerous documents, as required by 17 C.F.R. § 1.20(a) (“Such
customer funds when deposited with any bank . . . shall be deposited under an account
name which clearly identifies them as such . . . .”). These allegations permit the
reasonable inference that U.S. Bank, at one point, issued an acknowledgment letter, but
either lost or destroyed it. Certainly, it is plausible that an acknowledgment letter existed,
which, even if the court accepts U.S. Bank’s argument that a written acknowledgment is
a prerequisite to it being subject to the Act and the regulations, makes U.S. Bank
potentially liable for the alleged misconduct. In a motion to dismiss, plaintiffs “need not
provide specific facts in support of their allegations, Erickson v. Pardus, 551 U.S. 89
(2007) (per curiam), but they must include sufficient factual information to provide
‘grounds’ upon which the claim rests, and to raise a right to relief above a speculative
level.” Schaaf v. Residential Funding Corp., 517 F.3d 544, 549 (8th Cir. 2008) (quoting
Twombly, 550 U.S. at 556 n. 3) (parallel citations omitted). In this case, the Commission
did not indicate specifically that U.S. Bank issued a written acknowledgment, but given
its other allegations, it has pled sufficient factual information to raise its right to relief
above a speculative level. Accordingly, the court shall deny the Motion to the extent that
U.S. Bank argues that the Commission’s claims should be dismissed because the
Commission failed to specifically allege that U.S. Bank submitted a written
acknowledgment to Peregrine indicating that the 1845 Account was a CSA.

13

B. Applicability of the 2008 and 2011 Guaranties to the 1845 Account
1.

Parties’ arguments

U.S. Bank argues that even if it was required to comply with the Act and its
regulations, it did not violate 7 U.S.C. § 6d(b) through any alleged “use” of the 1845
Account, including its alleged use of the 1845 Account as security for the Wasendorfs’
loan and the Construction loan, for any person other than Peregrine’s customers.
Specifically, U.S. Bank argues that the 2008 and 2011 Guaranties, which both contained
a provision that gave 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],”
2008 Guaranty at 4; 2011 Guaranty at 3-4, only apply to the property in which Peregrine
had an ownership interest. Accordingly, U.S. Bank argues that since the 1845 Account
was a CSA and contained funds of Peregrine’s customers, Peregrine did not have an
ownership in such account and, therefore, Peregrine did not grant U.S. Bank a security
interest in the 1845 Account.6
The Commission argues that even though the plain language of the guaranties may
not give U.S. Bank a security interest in the 1845 Account, “at the time the guarant[ies]
were executed, U.S. Bank intended to apply Peregrine’s customer funds to offset the
Wasendorfs’ and/or Construction’s debt in the event of a default on their loans.”
Resistance at 9. Specifically, the Commission points out, as it alleged in its Complaint,
that “Peregrine had two depository accounts held by U.S. Bank when the [2008 and 2011
Guaranties] were executed. The ‘house’ account held less than $700,000 and the 1845
Account held over $7 million.” Id. According to the Commission, “[i]t defies logic that

6

The court notes that the 1845 Account did contain some of Peregrine’s funds,
which potentially belies U.S. Bank’s contention that it did not have an ownership interest
in at least some of the 1845 Account. However, given the court’s discussion below, the
court need not address whether Peregrine’s potential partial ownership interest in the 1845
Account makes the entire 1845 Account subject to the 2008 and 2011 guaranties.
14

U.S. Bank would extend multi-million dollar loans without a ‘security interest’ and
‘contractual right of set off . . .’ against funds in the 1845 Account.” Id. In support of
this position, the Commission states that “U.S. Bank and Banker A . . . calculated
Peregrine’s assets available, including the funds in the 1845 Account, to secure the two
loans in the event the debtors defaulted on their obligations” and that “U.S. Bank and
Banker A determined Peregrine’s valuation and risk rating by using the funds in the 1845
Account.” Id. at 7-8. The Commission also asserts that “[i]f Wasendorf’s fraudulent
scheme had not been discovered . . . prior to Construction’s default on its loan, U.S. Bank
would have applied Peregrine’s customer funds in the 1845 Account to set off
Construction’s debt.” Id. at 10.
2.

Applicable law

As an initial matter, the court shall apply Iowa law when analyzing the meaning of
the 2008 and 2011 guaranties given that both parties and the court agree that Iowa law
controls with respect to this issue.
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. Hospital
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
15

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 instead, stated that “‘meaning can almost never be plain except
in 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).
3.

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 at 4; 2011 Guaranty at 3-4. 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
16

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.”). In the Complaint, the Commission made numerous allegations
supporting its position that Wasendorf, as Peregrine’s representative, and U.S. Bank
intended the security interest provided for in the guaranties to include the 1845 Account,
including specific allegations that Banker A considered the 1845 Account to be part of the
security agreement on loans entered into by the Wasendorfs and Construction. See
Complaint ¶¶ 47, 54, 56, 58, 66, 68. 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. Since there is more than one reasonable interpretation of
what property the guaranties granted U.S. Bank a security interest in and this meaning
depends on extrinsic evidence, the meaning of this portion of the guaranties must be left
to the trier of fact. Therefore, the court cannot determine that the “allegations show on
the face of the complaint [that] there is some insuperable bar to relief.” See Benton, 524
F.3d at 870. Accordingly, the court shall deny the Motion to the extent that it seeks to
dismiss the Commission’s claims on the basis that the guaranties did not grant U.S. Bank
a security interest in the 1845 Account.

17

C. Alleged Improper Use and Holding of the 1845 Account
1.

Applicable law

7 U.S.C. § 6d(b) provides: “It shall be unlawful for . . . any depository[] that has
received any money, securities, or property for deposit in a separate account . . . to hold
. . . or use any such money, securities, or property as belonging to the depositing [FCM]
or any person other than the customers of such [FCM].” Id. However, pursuant to 17
C.F.R. § 1.23, FCMs are allowed to
[add] to such segregated . . . customer funds such amount or
amounts of money, from its own funds . . . as it may deem
necessary to ensure any and all . . . customers’ accounts from
becoming undersegregated at any time. . . . [An FCM] may
draw upon such segregated funds to its own order, to the
extent of its actual interest therein, including the withdrawal of
securities held in segregated safekeeping accounts held by a
bank . . . .
17 C.F.R. § 1.23. Essentially, FCMs are allowed to put excess money into the CSA so
that if a customer has a shortfall in its margin requirements, the FCM funds can
temporarily cover the shortfall instead of the FCM using another customer’s funds to cover
the shortfall.
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, L.C.C., 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

18

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. National Resources
Defense 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
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)).
2.

Alleged improper use of the 1845 Account
a.

Parties’ arguments

In the Complaint, the Commission asserts that U.S. Bank violated the Act and its
regulations by using a CSA—the 1845 Account—to secure loans to the Wasendorfs and
Construction. U.S. Bank argues that even if the court finds that the 1845 Account is part
of the security provided for in the 2008 and 2011 guaranties, it did not violate the Act
because it did not “use” such money for any person other than Peregrine’s customers.

19

U.S. Bank argues that since neither the Act nor the regulations define “use,” the court
should look to congressional intent and the plain meaning of the word to ascertain its
meaning.
In looking at congressional intent, U.S. Bank asserts that Congress’s purpose in
adding subsection (b) to 7 U.S.C. § 6d in 1968 “was to ‘prohibit expressly customers’
funds from being used to offset liability of the [FCMs] or otherwise being misappropriated’
by the depository.” Brief in Support of Motion at 10 (quoting S. Rep. No. 90-947 (1968),
reprinted in 1968 U.S.C.C.A.N. 1673, 1679). U.S. Bank argues that the Commission did
not allege that U.S. Bank used the money to offset Peregrine’s liability or that the
Commission otherwise misappropriated the funds in the 1845 Account.
With regard to the plain meaning of the word “use,” U.S. Bank points to authority
that supports its assertion that “[i]n the context of money, . . . ‘use’ occurs in a
transaction, such as purchasing a good or paying for rent.” Id. at 11. U.S. Bank also
cites Merriam-Webster Dictionary, which defines “use” as “‘to put into action or service’”
or “‘avail oneself of.’”

Id. (quoting Merriam-Webster Dictionary, available at

http://www.merriam-webster.com/dictionary/use). In light of this definition, U.S. Bank
argues that “[t]he plain meaning of ‘use’ in this context does not encompass simply
considering that funds were on deposit in the 1845 Account when deciding to extend
credit.” Id. at 12.
The Commission agrees that since the word “use” is not defined by the Act or
regulations, the court should look to the plain meaning of the words and congressional
intent. The Commission argues that the plain meaning of “use” encompasses U.S. Bank’s
use of the 1845 Account to determine whether to issue the Wasendorfs’ loan in 2008 and
whether to extend the repayment period for the Construction loan in 2011. Specifically,
the Commission asserts, as it alleged in its Complaint, that “Peregrine had two depository
accounts held by U.S. Bank when the [2008 and 2011 Guaranties] were executed. The

20

‘house’ account held less than $700,000 and the 1845 Account held over $7 million.”
Resistance at 9. According to the Commission, “[i]t defies logic that U.S. Bank would
extend multi-million dollar loans without a ‘security interest’ and ‘contractual right of set
off . . .’ against funds in the 1845 Account.” Id.
The Commission also argues that even considering congressional intent, in which
the subsection was added “to prohibit expressly customers’ funds from being used to offset
liabilities of the [FCM] or otherwise being misappropriated,” U.S. Bank violated the Act
by using the 1845 Account to secure the Wasendorfs’ loan and the Construction loan. Id.
at 4 (quoting S. Rep. No. 90-947 at 7) (internal quotation mark omitted). According to
the Commission, before Congress added subsection (b) to the Act, FCMs and depositories
entered into agreements whereby the depositories agreed not to offset potential FCM
liabilities owed to the depositories from CSAs. The Commission argues that Congress
added subsection (b) so the Commission could directly enforce what had been contractual
responsibilities of the depositories and the FCMs.
b.

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 mark omitted). Accordingly, the
court will give the term “use” its plain meaning.
At this stage, the court accepts the Commission’s factual allegations—that the 1845
Account was part of the security interest granted to U.S. Bank in the 2008 and 2011
guaranties and that Banker A and U.S. Bank considered the 1845 Account when
determining whether to issue the Wasendorfs’ loan and extend the Construction loan—as
true. See Iqbal, 556 U.S. at 678 (stating that a court may “accept[] as true” allegations
in a complaint). 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,” the court finds that the

21

Commission has “[pled] factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.”

Id.

First, the

Commission alleged that U.S. Bank “used,” or availed itself, of the 1845 Account when
it entered into the 2008 and 2011 guaranties with Peregrine, which enabled U.S. Bank to
collect interest on the associated loans it made to the Wasendorfs and Construction.
Second, the Commission points out that Wasendorf and his businesses had many other
accounts at U.S. Bank and, presumably, if U.S. Bank had not issued the Wasendorfs’ loan
or extended the Construction loan—of which the 1845 Account allegedly was the primary
security—Wasendorf plausibly could have closed these other accounts, which could have
been financially detrimental to U.S. Bank. Given that the Wasendorfs’ loan and the
Construction loan were not for the benefit of Peregrine’s customers, the court could draw
a reasonable inference that U.S. Bank violated 7 U.S.C. § 6d(b).7 Accordingly, the court
shall deny the Motion to the extent it requests that the court dismiss the Commission’s
claims on the grounds that U.S. Bank did not improperly use the 1845 Account.8

7

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 at 7. If the Commission can prove
that U.S. Bank used a CSA—the 1845 Account—as collateral for the loans, it increased the
risk that U.S. Bank would use the 1845 Account to offset Peregrine’s debts, and limiting
this risk is precisely the result Congress was trying to achieve. See id.
8

In the Complaint, the Commission alleges that U.S. Bank obtaining a security
interest on the 1845 Account could qualify not only as improperly using the 1845 Account
but also as improperly holding the 1845 Account. Complaint ¶ 84. However, since the
court has concluded that the Motion fails because the Commission has stated a plausible
claim that U.S. Bank improperly used the 1845 Account when it allegedly used the 1845
Account as security for the guaranties, the court need not address the issue of whether
(continued...)
22

3.

Alleged improper holding of the 1845 Account
a.

Parties’ arguments

In the Complaint, the Commission asserts that U.S. Bank violated the Act and its
regulations by allowing Wasendorf, as Peregrine’s AP, to transfer customer funds from
the 1845 Account to various accounts that he, his companies and Connie Wasendorf
owned. The Commission argues that by allowing Wasendorf to transfer money out of the
1845 Account, U.S. Bank violated the Act because U.S. Bank did not hold the funds as
belonging solely to Peregrine’s customers.
U.S. Bank argues that to “hold” means “‘to keep under restraint’” or “‘to keep
back from use.’” Brief in Support of Motion at 13 (quoting Merriam-Webster Dictionary,
available at http://www.merriam-webster.com/dictionary/hold). U.S. Bank also cites
various Commission releases in which the Commission stated that the purpose of 7 U.S.C.
§ 6d(b) is to ensure that customer funds are available to the FCM and its customers upon
demand.
U.S. Bank argues that the Commission made no allegations in its Complaint that
U.S. Bank ever held funds in the 1845 Account “under restraint” or “back from use.” Id.
Rather, U.S. Bank points out that the Commission argues that U.S. Bank did not put
enough restrictions on the customer accounts, which, according to U.S. Bank, runs counter
to the Commission’s policy of making customer funds freely available to the customers and
the FCM.
U.S. Bank also argues that it had no duty to monitor Wasendorf’s transfers to assure
that he was transferring money from Peregrine’s excess funds rather than Peregrine
customer funds. Moreover, U.S. Bank argues that it would have been impossible for it

8

(...continued)
U.S. Bank also improperly held the 1845 Account when it allegedly held the 1845 Account
as security for the guaranties.
23

to determine whether the money that Wasendorf transferred to himself, his companies and
Connie Wasendorf was Peregrine customer funds, which would be unlawful under 7
U.S.C. § 6d(b), or whether it was Peregrine’s excess funds, which, because it was not
Peregrine customer funds, is not unlawful under the Act. U.S. Bank argues that “[i]f
withdrawal for an improper purpose by an FCM equates to the depository holding funds
‘as belonging to the depositing [FCM] or any person other than the customers of such
[FCM],’ then all depositories would be strictly liable for the fraud of an FCM,” an
outcome contrary to Congress’s intent. Id. at 14-15 (quoting 7 U.S.C. § 6d(b)).
The Commission argues that U.S. Bank’s definition of “hold” is disingenuous given
that the first definition in Merriam-Webster dictionary is “to have possession or ownership
of or have at one’s disposal.” Resistance at 10 (quoting Merriam-Webster Dictionary,
available at http://www.merriam-webster.com/dictionary/hold) (internal quotation mark
omitted). The Commission argues that the plain language of the Act and the regulations
prohibited U.S. Bank from holding Peregrine customer segregated funds as if they
belonged to anyone other than the customers, and because U.S. Bank allowed Wasendorf
to “transfer[] out of the [1845 Account] to persons and entities U.S. Bank and Banker A
knew were for non-customer purposes,” U.S. Bank clearly violated the Act. Id. at 10-11.
With regard to U.S. Bank’s argument that it was impossible for it to know whether
the funds Wasendorf transferred were Peregrine’s excess funds or Peregrine customer
funds, the Commission argues that whether U.S. Bank knew that it was transferring
Peregrine customer funds rather than Peregrine’s excess funds from the 1845 Account is
a question of fact and, thus, a matter inappropriate at this stage of litigation and more
appropriate at trial. Moreover, the Commission cites one of its interpretative letters,
which states:
[B]anks used as depositories, which have been given prior
notice, may be violating the [Act] or be aiding and abetting a
violation if they acquiesce to the withdrawal or use of
24

customer funds by a FCM for an unlawful purpose. If less
than actual notice is received by such a bank, then the
[Commission] staff notes that the bank’s responsibilities are
less clear, but at least is equal to that extended to other trust
accounts.
Resistance at 12 (first alteration in original) (emphasis omitted) (quoting Interpretative
Letter 79-1, Comm. Fut. L. Rep. (CCH) at 1 (May 29, 1979)).
Next, the Commission discusses trust law as an analogy to a CSA and argues that,
while trust depositories usually do not have a duty to monitor trust accounts, the depository
may be liable for the amount misappropriated if it has knowledge that such
misappropriation will occur. According to the Commission, because U.S. Bank knew that
there were not enough excess Peregrine funds to cover Wasendorf’s transfers and had
notice that these transfers were for an improper purpose given that they were issued to
entities that U.S. Bank knew were not customers of Peregrine, U.S. Bank is liable for the
amount that Wasendorf improperly transferred.
In its Reply, U.S. Bank argues that the Commission ignores its own interpretative
letters that acknowledge that “‘[t]here is no case law discussing whether a bank has
authority to assure that customers’ funds are not misappropriated by [FCMs].’” Reply at
2 (quoting Interpretative Letter 79-1 at 2). Further, U.S. Bank argues that analogizing a
CSA to a trust account is inappropriate, given that the trustee-fiduciary typically does not
deposit his or her own money in the trust, whereas FCMs typically do.
b.

Application

The plain language of the statute states that “[i]t shall be unlawful for . . . any
depository[] that has received any money, securities, or property for deposit in a separate
account . . . to hold . . . any such money . . . as belonging to the depositing [FCM] or any
person other than the customers of such [FCM].” 7 U.S.C. § 6d(b). 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
25

required to hold this money as belonging only to such customers. However, the ability of
an FCM to deposit excess funds into such CSAs complicates matters because, pursuant to
17 C.F.R. § 1.23, if FCMs deposit money into the account, they can withdraw or transfer
this money to their own order. Therefore, although the statute states that depositories must
treat FCM customer funds as belonging to no one other than the customer, there is some
ambiguity about depositories’ duties when both the FCM and customers have deposited
funds in a CSA.
To the extent the statute is ambiguous as to whether there is a duty for depositories
to assure that an FCM is withdrawing or transferring its own money rather than that of its
customers, Interpretative Letter 79-1 fills the gap. Interpretative Letter 79-1 states that
“banks used as depositories, which have been given prior notice, may be violating the
[Act] or be aiding and abetting a violation if they acquiesce to the withdrawal or use of
customer funds by a FCM for an unlawful purpose.” Interpretative Letter 79-1 at 1.
Since the Commission alleges that U.S. Bank knew that Peregrine did not have enough of
its excess funds to cover the transfers to Wasendorf and his companies9 and that U.S. Bank
knew that Wasendorf was not transferring the funds to benefit Peregrine’s customers, the
court finds that “[the Commission pled] factual content that allows the court to draw the
reasonable inference that [U.S. Bank] is liable for the misconduct alleged.” See Iqbal, 556
U.S. at 678. Accordingly, the court shall deny the Motion to the extent that it asks the
court to dismiss the Commission’s claim that U.S. Bank improperly held Peregrine
customer funds.

9

For example, the Commission alleges that “[b]etween June 2008 and June 2012,
more than $118 million was deposited into the 1845 Account, more than 94% of which
represented customer funds. During the same time, more than 30% of those funds were
used by Wasendorf for personal expenditures and his other companies.” Complaint ¶ 73.
26

D. Restitution
1.

Parties’ arguments

In the Complaint, the Commission seeks restitution pursuant to 7 U.S.C. § 13a1(d)(3). Pursuant to that section: “[T]he Commission may seek, and the court may
impose, on a proper showing, on any person found in the action to have committed any
violation, equitable remedies including . . . 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).
U.S. Bank argues that even if the Commission has adequately stated a claim
asserting that it violated the Act and its regulations, the Commission has failed to allege
facts that would entitle Peregrine’s customers to restitution. Specifically, U.S. Bank states
that the Complaint “fails to allege that anyone sustained losses ‘proximately caused’ by
U.S. Bank’s conduct . . . and fails to plead facts showing how such remedies could
appropriately be imposed upon U.S. Bank, which was itself a victim of Wasendorf’s fraud.
Brief in Support of Motion at 23.
With respect to the Commission’s request that U.S. Bank “make full restitution to
each and every Peregrine customer whose funds [U.S. Bank] improperly held in the 1845
Account,” Complaint at 20, U.S. Bank argues that the Commission failed to allege that
U.S. Bank’s conduct was the proximate cause of Peregrine’s customers’ losses. U.S. Bank
cites to numerous cases in which courts have held that banks, without more, are not liable
when their customers’ funds are lost due to the bank processing the transactions of a thirdparty wrongdoer, because the banks did not proximately cause the losses. Finally, U.S.
Bank argues that Peregrine’s customers are not entitled to restitution because there is no
allegation that U.S. Bank itself took the customers’ money.
The Commission argues that the existence of proximate cause is “not appropriately
considered or determined on a motion to dismiss.” Resistance at 16. The Commission

27

also argues that the cases to which U.S. Bank cites are inapposite because in those cases,
there was no evidence of misconduct on the part of the banks.

Additionally, the

Commission contends that U.S. Bank’s definition of restitution is too narrow and argues
that the court has wide discretion in determining the proper remedy.
2.

Applicable law

The equitable remedy of restitution is available if a plaintiff shows that a defendant’s
conduct was the proximate cause of the FCM’s customers’ losses. See 7 U.S.C. § 13a1(d)(3). Neither the Act, the United States Supreme Court nor the Eighth Circuit Court
of Appeals have defined proximate cause in the context of the Commodity Exchange Act.
However, “i[t] 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.’”

Lamie, 540 U.S. at 534 (quoting Hartford

Underwriters Ins. Co., 530 U.S. at 6); accord Owner-Operator Indep. Drivers Ass’n, 556
F.3d at 693. The United States Supreme Court explained the meaning of proximate cause
in Holmes v. Sec. Investor Protection Corp., 503 U.S. 258 (1992). In that case, the
Supreme Court defined proximate cause in the context of a civil Racketeer Influenced and
Corrupt Organizations Act (“RICO”) suit. Id. at 268-70. The Supreme Court insisted that
the central notion of proximate cause was a “demand for some direct relation between the
injury asserted and the injurious conduct alleged.” Id. at 268; accord Newton v. Tyson
Foods, Inc., 207 F.3d 444, 447 (8th Cir. 2000) (stating that, in the context of a RICO
claim, “[s]ince but-for causation, or causation in fact, has no logical ending point, the
concept of proximate cause [is needed to] cut[] off liability for those damages only
distantly caused by a defendant’s bad acts”).
The United States Courts of Appeals are divided on the meaning of “restitution” and
“disgorgement” in the context of 7 U.S.C. § 13a-1(d)(3). In SEC v. Huffman, 996 F.2d
800 (5th Cir. 1993), the Fifth Circuit Court of Appeals held that “disgorgement is not

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precisely restitution. Disgorgement wrests ill-gotten gains from the hands of a wrongdoer.
. . . Disgorgement does not aim to compensate the victims of the wrongful acts, as
restitution does. . . . [Disgorgement] is not restitution.” Id. at 802; see also CFTC v.
Rosenberg, 85 F. Supp. 2d 424, 455 (D.N.J. 2000) (“While restitution ‘is meant to make
the damaged persons whole and compensate them for a defendant’s wrongful acts,’ the
disgorgement remedy ‘is intended to deprive the violator of his ill-gotten gains and to
further the . . . objectives of the [Act]’” (quoting CFTC v. AVCO Fin. Corp., 28 F. Supp.
2d 104, 121 (S.D.N.Y. 1998), rev’d on other grounds, 228 F.3d 94 (2d Cir. 2000))).
However, in CFTC v. Wilshire Inv. Mgmt. Corp., 531 F.3d 1339 (11th Cir. 2008), the
Eleventh Circuit Court of Appeals held that “[t]he equitable remedy of restitution does not
take into consideration the plaintiff’s losses, but only focuses on the defendant’s unjust
enrichment.” Id. at 1345; cf. FTC v. Verity Int’l., Ltd., 443 F.3d 48, 66-67 (2d Cir.
2006) (holding that, in the context of the FTC Act, “restitution must be limited to so-called
equitable restitution,” which, according to the Second Circuit, “allowed the plaintiff to
recover money or property in the defendant’s possession that could ‘clearly be traced’ to
money or property ‘identified as belonging in good conscience to the plaintiff’” (quoting
Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 212 (2002))).
3.

Application

Since the court finds that the Supreme Court’s definition of proximate cause in
Holmes is consistent with the plain meaning of proximate cause in the Act, the court finds
that, in the context of 7 U.S.C. § 13a-1(d)(3), to show proximate cause, the Commission
must show “some direct relation between the injury asserted and the injurious conduct
alleged.” Holmes, 503 U.S. at 268.
With regard to the meaning of restitution, the court finds that it is inappropriate to
determine whether the Commission must show that U.S. Bank received a benefit to claim
restitutionary damages at this point, given the divided Courts of Appeals and the fact that

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the parties have not adequately briefed this issue. Under either test, the court finds that
the Commission has stated a plausible claim for restitutionary relief.
If the court were to apply the Fifth Circuit Court of Appeals test, which defines
restitution as “aim[ing] to compensate the victims of wrongful acts,” Huffman, 996 F.2d
at 802, the court finds that the Commission has alleged facts sufficient to state a claim for
restitution for the losses proximately caused by U.S. Bank’s alleged violations of the Act.
The Commission alleged that U.S. Bank improperly held Peregrine customer funds in the
1845 Account by transferring money out of the account for the benefit of Wasendorf, his
companies and Connie Wasendorf—and not the benefit of Peregrine’s customers. If the
Commission can prove these wrongful acts, it may be able to show that U.S. Bank directly
injured Peregrine’s customers by not having money available when they demanded it,
entitling them to restitution.
Even if the court were to apply the more limited Eleventh Circuit Court of Appeals
test, which states that restitution “does not take into consideration the plaintiff’s loss, but
only focuses on the defendant’s unjust enrichment,” Wilshire Inv. Mgmt. Corp., 531 F.3d
at 1345, the Motion still must fail. The Commission alleged that “Banker A and other
U.S. Bank personnel perceived Wasendorf as a successful, desirable bank client with the
potential to be a profitable, high growth client . . . . Banker A and U.S. Bank believed
that it was important to maintain Wasendorf’s and Peregrine’s goodwill in order to protect
the bank’s relationship with them.” Complaint ¶ 19-20. This ongoing relationship, which
could have been perpetuated by U.S. Bank’s willingness to transfer Peregrine customer
funds to Wasendorf and his companies, could have led to innumerable benefits (for
example, increasing the bank’s deposits and attracting other customers) of which the
Commission is entitled to determine in discovery. Moreover, the Commission alleges that
U.S. Bank benefitted from accepting customer funds by allowing U.S. Bank to extend
credit on the security of the Peregrine customer funds in the 1845 Account. Although

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U.S. Bank did not deposit money transferred out of the 1845 Account into its own
accounts, the Commission’s allegation that U.S. Bank benefitted from the transfers in other
ways is factually sufficient to support a claim for restitution, the extent of which the
Commission can determine in discovery.
U.S. Bank’s reliance on cases in which courts held that a bank was not liable for
merely processing transactions that ultimately contributed to customers’ financial losses
in support of its position that the Commission is not entitled to seek restitution also is
unconvincing because, in those cases, there was no allegation of wrongdoing on the part
of the banks. In this case, however, the Commission has made multiple allegations that
U.S. Bank knew it was improperly using and holding Peregrine customer funds for the
benefit of someone other than Peregrine’s customers. Accordingly, the Court shall deny
the Motion to the extent it asks the court to dismiss the Commission’s request for
restitutionary relief.
E. Disgorgement
1.

Parties’ arguments

In the Complaint, the Commission requests that the court order U.S. Bank to
disgorge all benefits derived from unlawful activities under the Act pursuant to 7 U.S.C.
§ 13a-1(d)(3). Pursuant to that section: “[T]he Commission may seek, and the court may
impose, on a proper showing, on any person found in the action to have committed any
violation, equitable remedies including . . . disgorgement of gains received in connection
with such violation.” 7 U.S.C. § 13a-1(d)(3).
U.S. Bank contends that “the only possible gains the [Commission] identifies in the
Complaint consist of $290,000 of interest allegedly earned on the . . . Construction [l]oan,
and $29,000 in interest earned on the Wasendorf[s’] [l]oan, during periods when the
[Commission] alleges U.S. Bank wrongfully accepted [Peregrine’s] guaranties of those
debts.” Brief in Support of Motion at 26. However, U.S. Bank argues that because it

31

incurred a loss of more than $6.6 million on the Construction loan, it did not profit on the
guaranties, which means it did not receive any gains that must be disgorged under the Act.
U.S. Bank also argues that the Commission has failed to show causation between
the guaranties and the interest that U.S. Bank received under the loans subject to the
guaranties, because “a guaranty does not earn interest . . . [and] provides no financial
return of any kind unless and until invoked and collected upon by the obligee after the
primary obligor’s default.” Id. at 27. According to U.S. Bank, since the Commission
“alleges only interest earned in connection with the underlying loans,” there were no gains
in connection with any alleged violation of the Act. Id.
The Commission argues that although it alleged that U.S. Bank received gains of
$319,000 in interest payments on the loans that were secured by the guaranties, the
Commission should be permitted to determine if there were additional gains in the
discovery process. The Commission also disputes U.S. Bank’s causation argument and
claims that “[b]y accepting Peregrine’s guaranties for the loans knowing that they included
[Peregrine] customer funds and earning interest on the loans, U.S. Bank violated the Act
and should be required to disgorge the interest it earned and any other ill-gotten gains,”
regardless of whether U.S. Bank ever exercised its rights under the guaranties. Resistance
at 21.
2.

Applicable law

“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.’”

Lamie, 540 U.S. at 534 (quoting Hartford

Underwriters Ins. Co., 530 U.S. at 6); accord Owner-Operator Indep. Drivers Ass’n, 556
F.3d at 693. Under 7 U.S.C. § 6d(b), if a depository receives money for deposit in a
CSA, it may not “hold . . . or use any such money . . . as belonging to the depositing
[FCM] or any person other than the customers of such [FCM].” 7 U.S.C. § 6d(b). If a

32

depository has violated this provision, “the Commission may seek . . . disgorgement of
gains received in connection with such violation.” 7 U.S.C. § 13a-1(d)(3).
3.

Application

In the Complaint, the Commission alleges that U.S. Bank received $319,000 in
interest payments from loans that were secured by the 1845 Account.

While the

Commission concedes that U.S. Bank filed a claim in Peregrine’s bankruptcy proceedings
for over $6 million on the Construction loan, the Commission does not concede that U.S.
Bank was entitled to this money or that it lost this amount of money from making the
Construction loan. Moreover, given the Commission’s allegations about the nature of
U.S. Bank’s relationship with Wasendorf, it is certainly plausible that U.S. Bank received
additional gains in connection with violations of the Act.

See Complaint at 20-21

(requesting that U.S. Bank disgorge “all benefits received[,] including, but not limited to,
salaries, commissions, loans, fees, interest and revenues derived, directly or indirectly,
from acts or practices that constitute violations of the Act”). Therefore, the Commission
asserts that U.S. Bank received gains “in connection with” alleged violations of the Act,
and, accordingly, the court shall deny the Motion to the extent it asks the court to dismiss
the Commission’s request for disgorgement of U.S. Bank’s gains.

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VII. CONCLUSION
In light of the foregoing, Defendant U.S. Bank, N.A.’s Motion (docket no. 10) is
DENIED.
IT IS SO ORDERED.
DATED this 5th day of November, 2013.

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