U.S. Bank: The Depository’s Duty to Segregated Customers

In the US Bank Peregrine CFTC settlement, U.S. Bank agreed to pay $18 million to Peregrine’s trustee for domestic futures customers to resolve allegations that it misused their segregated funds. The bank had acknowledged in writing that the account held customer money. According to the Commodity Futures Trading Commission’s account of the court’s findings, the employees responsible for it did not understand what that designation meant. For someone who knows the account-opening paperwork, the fee debits or the transfer approvals, that gap is the story.

The February 4, 2015 consent order directed the payment to Peregrine’s court-appointed trustee as a contribution for customers, expressly not a fine or penalty. It also permanently prohibited U.S. Bank from violating the customer-fund protections at issue. This was a separate action against the bank holding the money, with its own conduct and its own settlement.

Why the Depository Had Its Own Duty

A futures commission merchant accepts customer orders and collateral for trading. Depository bank misuse of an FCM customer account concerns what the bank does with money that belongs to the broker’s customers. Peregrine Financial Group was that merchant. U.S. Bank held its customer segregated account as a depository.

That division of work matters in FCM customer funds misappropriation. Cash, securities and other property deposited to support customers’ trades must remain separate from the merchant’s own funds. The account gives the merchant a place to hold customer assets, not another source of business financing.

The consent order explains the bank’s responsibility under the Commodity Exchange Act and the customer segregation rules: a depository cannot hold, dispose of or use those assets as though they belong to the merchant or somebody other than its customers. The bank’s responsibility follows the customer money into the account it holds.

The Commodity Futures Trading Commission brought this action against U.S. Bank as one of its customer-fund enforcement cases. Its case focused on the bank’s handling of the account.

A Customer Account Treated as Business Checking

In the U.S. Bank Peregrine customer account case, the CFTC alleged that the bank treated segregated customer funds like Peregrine’s commercial checking account. Its complaint announcement described transfers for the chief executive’s private jet, restaurant and divorce settlement. The agency alleged that U.S. Bank knew these transfers did not benefit Peregrine’s customers.

The Commodity Futures Trading Commission’s later settlement announcement described approximately $36 million in withdrawals and transfers to people and businesses that were not Peregrine customers during June 2008 through July 2012. Against those withdrawals, U.S. Bank agreed to contribute $18 million for customers. We see a bank promising back less than the customer money that left its account for other people’s purposes.

Fees supplied another example. The agency’s account of the court findings described U.S. Bank regularly taking fees from the segregated account for both Peregrine accounts and non-Peregrine accounts at the bank. Customer money was paying charges attached to accounts beyond the customer account itself.

That detail is easy to lose in a story about an executive’s theft. For a bank operations employee, it makes the case concrete.

Customer Funds as Loan Security

The complaint also alleged that U.S. Bank accepted Peregrine customer funds as security for loans to the chief executive, his spouse and his construction company. The loans financed an office complex for Peregrine in Cedar Falls, Iowa. The agency placed that alleged loan-security conduct from approximately September 2008 through July 2012.

The borrowing and the customer account therefore belonged in the same inquiry. The agency alleged that money entrusted for customers’ trading supported credit extended to other people. For an employee familiar with the lending relationship, the relevant story includes what the loan documents treated as security and whose funds stood behind it.

Two Acknowledgments, No Understanding at the Account Desk

U.S. Bank’s acknowledgment letters and the account’s actual handling told different stories. In its settlement announcement, the Commodity Futures Trading Commission described the court’s finding that Peregrine opened the account at a predecessor bank with a customer segregated designation. U.S. Bank supplied two letters acknowledging that it contained customer money, would remain properly segregated and would be maintained under the Commodity Exchange Act.

Yet, according to that same account of the findings, none of the U.S. Bank employees responsible for the account at the time understood that it was a customer segregated account or understood what that designation meant. The agency described the surrounding failure just as plainly:

We find that disconnect extraordinary. The bank could put the promise in writing twice, while the people responsible for the money did not understand the promise. The missing connection was between the acknowledgment and the work of handling the account.

After the Commodity Futures Trading Commission began investigating in July 2012, U.S. Bank introduced policies and procedures specifically for FCM customer segregated accounts. The final order records the bank’s representation, recognized by the Commission, that it had strengthened its internal controls and policies for those accounts.

What U.S. Bank Agreed to in the Settlement

In the settlement, U.S. Bank accepted the facts the court had already found in November 2014. It also agreed that it and its employees and agents would not publicly deny them.

U.S. Bank accepted permanent restrictions against misusing customer funds and the obligation to contribute money for Peregrine’s domestic futures customers. The order directed the contribution to the trustee for those customers.

The False Balance Had Its Own Verification Channel

Peregrine’s false bank-balance story explains why account handling and independent confirmation both matter. In its separate July 2012 complaint announcement, the CFTC alleged that Peregrine represented it held more than $220 million in customer funds when approximately $5.1 million existed.

In his criminal plea agreement, Peregrine’s chief executive admitted stealing millions of dollars from customers. The Justice Department’s account of the criminal case describes forged bank statements and a post office box used to intercept verification requests intended for U.S. Bank. The person taking the money could also interfere with the supposed check on whether it was there.

A forged statement and a misused account expose different parts of the problem. One concerns the reported balance and the route used to confirm it. The other concerns the bank’s handling of actual funds. An insider who knows how confirmations traveled may explain the first. Someone who knows the transfers, fees or lending documents may explain the second.

What Evidence Is Required to Prove Fraud?

For a customer-account case, we assess the evidence with you: acknowledgment letters, account records, transfer instructions, fee charges and confirmation correspondence. Your view inside treasury, lending, operations, audit or compliance may connect documents that otherwise look unrelated. You do not need to arrive with the finished case.

Customer-Fund Safeguards After Peregrine

The segregation duty already existed when Peregrine failed. The Commodity Futures Trading Commission’s November 2013 customer-protection rule, effective January 13, 2014 with phased compliance dates, strengthened depository acknowledgments and access to account information. That is where the false-confirmation story meets the bank’s own responsibilities.

MF Global shows another use of customer money for someone else’s obligations. Its November 2013 company order addressed customer funds used during a liquidity crisis for proprietary operations, affiliates and other obligations. At U.S. Bank, the focus was the depository’s treatment of the account. Both cases put the purpose of a withdrawal beside the ownership of the money funding it.

The scale extends well beyond either firm. In its FY 2021 President’s Budget, published in 2020, the Commodity Futures Trading Commission described almost $334 billion in customer funds held by futures commission merchants. The document also reported increasing concentration of customer funds as fewer FCMs served growing futures and cleared swaps markets.

CFTC Whistleblower Rewards

The Commodity Futures Trading Commission’s whistleblower program provides an aggregate award of 10% to 30% of qualifying sanctions collected for eligible whistleblowers. We assess how your knowledge and role fit the whistleblower program with you.

For comparison, the False Claims Act is a separate whistleblower program. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. This page identifies no False Claims Act claim in the U.S. Bank case.

You Know What the Account Was For

If you know why a customer account paid someone else’s bills, or how its true balance disappeared behind a false confirmation, speak to one of our Whistleblower Experts about what you saw inside the banking relationship. We build your strongest CFTC whistleblower case with you and bring in CFTC whistleblower lawyers who understand segregated funds, depository responsibilities and the records connecting them. We stay beside you from that first account of what happened through the pursuit of your case.