The Blotter: U.S. Bank hit with injunction due to PFG accounts

Also: Action against Banc de Binary and CFTC-SEC warning on binary option schemes

Regulatory actions this week:

Nevada


CFTC charges “Prediction Market” proprietor Banc de Binary with violating the CFTC’s off-exchange options trading ban and operating as an unregistered futures commission merchant


The U.S. Commodity Futures Trading Commission (CFTC) filed a civil complaint in federal district court in Nevada charging Banc de Binary, Ltd. (Banc de Binary), a foreign company that held itself out as being headquartered on Wall Street, with violating the CFTC’s ban on off-exchange options trading by offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers. The CFTC’s complaint also charges Banc de Binary with operating as an unregistered Futures Commission Merchant (FCM).

According to the CFTC’s complaint, Banc de Binary operates an online trading website through which customers can buy or sell binary (“call” or “put”) options, predicting whether the price of a certain commodity will increase or decrease in a given time period.

 Specifically, from May 2011 through March 2013, Banc de Binary operated an online trading website that allowed U.S. customers to trade options products prohibited by the CFTC’s ban on off-exchange options trading. Through its website, Banc de Binary allegedly unlawfully solicited and permitted U.S. customers to buy and sell options betting on the prices of wheat, oil, platinum, sugar, coffee, corn, foreign currency pairs, and stock indices.

The CFTC’s complaint also charges Banc de Binary with operating as an unregistered FCM from July 2011 through March 2013.  Finally, the complaint alleges the company did not limit its options offerings to eligible contract participants, allowing U.S. customers to trade without requiring any information about their trading history or net worth.

David Meister, the director of the CFTC’s Division of Enforcement, stated: “If a company wants to offer U.S. persons the opportunity to buy and sell predictions on the direction of commodity prices, the company must play by the rules or suffer the consequences.  The applicable rules are on the books for good reason – to protect market participants and promote market integrity – and we will serve the public by enforcing them.” 

The CFTC seeks civil monetary penalties, an injunction preventing Banc de Binary from engaging in certain commodity options activity with U.S. customers, and other remedial ancillary relief, including restitution, disgorgement, and rescission.

The CFTC today also announced the issuance of a joint CFTC and SEC Consumer Alert on fraudulent schemes involving binary options and their trading platforms. The Alert warns customers that the perpetrators of these schemes allegedly refuse to credit customer accounts, deny fund reimbursement, commit identity theft, and manipulate software to generate losing trades.

Iowa


CFTC files complaint against U.S. Bank, N.A. alleging unlawful use of Peregrine Financial Group, Inc.’s customer segregated funds and violation of customer segregation laws

 

The CFTC filed a complaint in the U.S. District Court for the Northern District of Iowa against U.S. Bank National Association (U.S. Bank) for unlawfully using and holding Peregrine Financial Group, Inc.’s (Peregrine) customer segregated funds.  U.S. Bank is the fifth largest bank in the country and maintains branch offices in Cedar Falls, Iowa, where Peregrine and its owner, Russell R. Wasendorf Sr. (Wasendorf), were located.

The Commodity Exchange Act (CEA) and CFTC regulations prohibit depository institutions, like U.S. Bank, from using or holding funds that belong to customers of a futures commission merchant (FCM) as though they belong to anyone other than the customers, and also prohibit the extension of credit based on such funds to anyone other than the customers.

The complaint alleges that U.S. Bank was a depository institution serving Peregrine, a registered FCM, and Wasendorf since 1992.  From approximately September 2008 to July 2012, U.S. Bank unlawfully accepted Peregrine’s customers’ funds as security on loans it made to Wasendorf, his wife, and his construction company, Wasendorf Construction, L.L.C., to build an office complex for Peregrine in Cedar Falls, Iowa.  The complaint further alleges that from approximately June 2008 to July 2012, U.S. Bank improperly held Peregrine’s customers’ funds in an account U.S. Bank treated as Peregrine’s commercial checking account and knowingly facilitated Wasendorf’s transfers of millions of dollars of customers’ funds out of this account to pay for Wasendorf’s private jet, his restaurant, and his divorce settlement, among other things.  U.S. Bank knew that these transfers were not for the benefit of Peregrine’s customers, according to the complaint.

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