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U.S. Bancorp Sued by CFTC

The U.S. Commodities Futures Trading Commission (:CFTC) charged U.S. Bank National Association – a unit of U.S. Bancorp (USB) – of illegal activities leading to the collapse of brokerage firm Peregrine Financial. The U.S. regulatory body alleged that U.S. Bancorp intentionally allowed Russell Wasendorf – the founder of Peregrine – to use customers’ money deposited at the bank for his personal interests. In February, Wasendorf began his 50-year imprisonment sentence for duping $215 million from customers.

The lawsuit, filed in the U.S. District Court for the Northern District of Iowa, accused U.S. Bank NA of doling out customers’ money as security for lending to Wasendorf and his construction company. Peregrine had a customer account at U.S. Bank, which the latter allegedly treated as a commercial checking account. The plaintiff demanded penalization for violations of the Commodity Exchange Act and federal regulations, along with monetary fines from the accused.

Last year, the fraud concerning Wasendorf came to the forefront and it dealt a major blow to the futures industry, which was already reeling under the collapse of MF Global in late 2011. Moreover, Wasendorf’s illegal activities were compared to New York money manager Bernie Madoff's colossal and infamous Ponzi scheme.

CFTC alleged that U.S. Bank knowingly permitted Wasendorf to limit both access and information about an account holding millions of dollars of Peregrine's customer finances to himself alone. Further, Wasendorf duped the auditors into believing that the account had a balance of $200 million, when in fact, since May 2005 it had roughly $15.7 million.

The outcome of the CFTC case could bear an impact on many other civil or class-action lawsuits. However, these cases tend drag on for a long time. An earlier lawsuit by regulators against U.S. Bancorp for the collapse of Sentinel Management Group has been meandering its way through the courts for almost 5 years.

However, in 2012, JPMorgan Chase & Co. (JPM) paid $20 million settlement charges to CFTC, over its unlawful handling of customer segregated funds at Lehman Brothers during the financial crisis.

Litigation overhangs have been a common problem for major U.S. banks since the financial meltdown. These lawsuits will likely tarnish the companies’ reputation, and also be an overhang on its financials over time. However, investors and other financial institutions, who have suffered as a result of the faulty practices, are expected to be duly compensated.

U.S. Bancorp currently carries a Zacks Rank #3 (Hold). Better performing stocks include Comerica Inc. (CMA) and Fifth Third Bancorp (FITB), both of which have a Zacks Rank #2 (Buy).

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