CHICAGO (CN) - In a federal class action against top officers of bankrupt Peregrine Financial Group, customers claim that the slightest investigation would have uncovered CEO Russell Wasendorf Sr.'s theft of $200 million over two decades.
Lead plaintiff Marcus Ibrahim sued company founder Wasendorf Sr., former CEO and president Russell Wasendorf Jr., vice chairman Neil Aslin, CFO Brenda Cuypers, chief compliance officer Susan O'Meara, Peregrine's outside auditor Veraja-Snelling Co. and its owner Jeannie Veraja-Snelling, and U.S. Bank, which "had custody of PFG customers' segregated funds at relevant times."
Wasendorf Sr. tried and failed to commit suicide in July, on the eve of a Commodity Futures Trading Commission lawsuitagainst him and Peregrine.
Now Peregrine's customers demand restitution, claiming the defendants' lack of oversight allowed Wasendorf to swipe millions over two decades, and would have had the same result if "the defendants had actively plotted by Wasendorf Sr.'s side."
In the CFTC's lawsuit, the regulator said Wasendorf and Peregrine could not account for more than $200 million of customer's funds.
Ibrahim, a Peregrine customer, claims he lost hundreds of thousands of dollars due to Wasendorf's fraud.
"From at least 1992, PFG founder Russell Wasendorf, Sr. misappropriated nearly $200 million in segregated customer funds to capitalize PFG, pay PFG's regulatory fines, and bankroll his own lavish personal spending," the complaint states. "Wasendorf Sr. concealed his theft by sending forged bank reports to regulators.
To avoid detection, Wasendorf Sr. opened a post office box, and gave the post office box address to regulators as the address of the bank that was supposed to hold the segregated funds.
"On July 9, 2012, when regulators were finally on the verge of detecting the theft,
Wasendorf Sr. wrote notes confessing his crimes, and attempted to commit suicide by inhaling exhaust from his car.
"Wasendorf Sr. was later arrested and indicted in federal court in Iowa. PFG filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code, and a receiver was appointed.
"Wasendorf Sr.'s scheme was brazen and blatant, and would have been easily detected upon even minimal investigation. However, none of the many parties who were in a position and under an obligation to detect the theft lifted a finger to do so."
Ibrahim claims that the co-defendant corporate officers "failed utterly."
"Despite the fact that Wasendorf Sr. carried out his scheme under their very noses, the officers abdicated all responsibility and willfully blinded themselves to the crime that was taking place within PFG," the complaint states.
"Likewise, PFG's auditors, including Veraja-Snelling Company ('VSC') and Jeannie Veraja-Snelling ('Veraja-Snelling'), were responsible for the effects of the scheme. The auditors were under a duty to verify the accuracy of PFG's financial statements, including those regarding segregated customer funds. Despite the fact that the statements were completely polluted with misinformation, the auditors took no steps to effectively discharge their duties.
"Finally, the custodians of PFG customers' segregated funds, including U.S. Bank, N.A. ('U.S. Bank'), failed to effectively respond to Wasendorf Sr.'s fraud. There can be no doubt that U.S. Bank was aware of the actual balance of PFG's customer segregated account at its branch in Cedar Falls, Iowa. U.S. Bank knew, or through even minimal investigation should have known, that the sub-$10 million balance in the account was woefully inadequate for a firm the size of PFG, and therefore should have made inquiries with the National Futures Association ('NFA'), PFG's designated self-regulatory organization, which would have uncovered the scheme. Moreover, U.S. Bank knew, or should have known that Wasendorf Sr. was using the signature of one of its own employees to forge his false bank reports.
"The collective abdication of responsibility by the defendants created a 'perfect storm' for Wasendorf Sr.'s decades-long campaign of misappropriation of customer segregated funds. Vigilance by even one of the defendants would have revealed and ended the scheme. But all stood idle, and PFG's customers paid the price. The defendants' willful failure to exercise even a modicum of oversight is, in its effects, the same as if the defendants had actively plotted by Wasendorf Sr.'s side."
Ibrahim seeks restitution and damages for violations of the Commodity Exchange Act, breach of fiduciary duty, conversion, tortious interference, negligence, negligent supervision, and aiding and abetting.
His lead counsel is Jennifer Sprengel, with Cafferty, Clobes, Meriwether & Sprengel.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.