White Collar Defense Update

A recent Northern District of Illinois case concerning fraud against investors alleges causes of actions against the financial institutions where the investors' funds were being held. This case poses an interesting question as to whether financial institutions should have a heightened duty to monitor bank accounts that are known to be customer segregated accounts.

In In re: Peregrine Financial Group Customer Litigation, 12-C-5546, the plaintiffs are a class of customers of the Peregrine Financial Group, a futures commissions merchant. Plaintiffs allege a twenty year scheme of fraud and concealment by Russell Wasendorf, Sr., the founder of Peregrine, whereby Wasendorf would take funds from Peregrine's customer accounts located at US Bank and use the funds for his own personal use and gain or to cover Peregrine's business expenses. Funds looted included multi-million dollar transfers from customer segregated accounts at JPMorgan to bank accounts at US Bank. Wasendorf's fraud scheme involved intercepting mail sent to US Bank by his auditors or the National Futures Association ("NFA") and then forging responses to fool his auditors or the NFA. Wasendorf would also forge US Bank statements and other documents that reflected the balances in his U.S. Bank accounts. Using the forgeries, Peregrine convinced the NFA that it had over $200 million dollars in its bank accounts when it in fact had only $5 million.

Continue reading "Defrauded Peregrine Investors Seek Relief Against Banks" »

by Matthew M. Maher

Since the Small Business Jobs Act was passed in 2010, there has been a significant increase in both the number and the average size of Small Business Administration (SBA) loans. Yet while the SBA continues to encourage its national and regional lending partners to originate more SBA loans, two recent Advisory Memoranda issued by the SBA's Office of the Inspector General (OIG) make the invitation less palatable, as the SBA is about to apply much higher scrutiny to the underwriting practices of its lending partners. Indeed, the SBA loans is placing its lending partners on notice that, if these loans default, their underwriting decisions will be second-guessed and their ability to recover under the SBA's guarantee is not assured.

Historically, the SBA delegated underwriting decisions to its approved lenders and discouraged its loan specialists from second-guessing the lender's underwriters. In stark contrast, the proposed new policy will require the SBA to perform a "more extensive underwriting and eligibility review" that will factor heavily into whether the SBA will honor its guaranty on the defaulted loan.

The OIG's Advisory Memoranda, dated March 23, 2012 (Report No. 12-11R) and August 16, 2012 (Report No. 12-18), resulted from several audits of the SBA's National Guarantee Processing Center's (NGPC's) review of loan packages for early-defaulted loans of $500,000 or more. The first OIG memorandum concluded that the NGPC's limited, superficial review of lender underwriting was not consistent with statutory and regulatory authority, was contrary to SBA procedures, and had cost the SBA millions in guarantees that should not have been paid. The second OIG memorandum recommended, inter alia, that the NGPC strengthen its review process for high-dollar early-defaulted loans, in particular to verify compliance with SBA's repayment ability requirements.

The bottom line for banks that originate SBA loans is that from now on the SBA will look very closely at - and second guess - their underwriting decisions before honoring its guaranty.

The Financial Crimes Enforcement Network (FinCEN) recently issued an Advisory to remind financial institutions and the lawyers that represent them that Suspicious Activity Reports (SARs) must remain confidential. SARs are issued by financial institutions to report suspicious activity to law enforcement. The unauthorized disclosure of a SAR could tip off suspects, deter institutions from filing SARs and jeopardize the institutions that issue the SARs. FinCEN is concerned because private parties are attempting to learn of the existence of SARs in the context of civil litigation. Financial institutions, and people representing them, are forbidden from disclosing the existence of a SAR, or even from disclosing information that would reveal that a SAR may exist. Unauthorized disclosure of a SAR is subject to civil penalties of up to $100,000 per violation or criminal penalties of up to $250,000 and imprisonment of up to 5 years. The disclosing financial institution, moreover, could be subject to penalties for anti-money laundering program deficiencies. FinCEN even requires a financial institution that recieves an unauthorized request for a SAR to immediately contact FinCEN's Office of Chief Counsel. As to SARs, therefore, the best policy is clearly "don't ask, don't tell."