* Nine months after MF Global, pattern looks familiar
* Regulator says accounts hold $5 mln, not $225 mln
* Broker lacks sufficient assets to meet obligations-NFA
* PFGBest founder Russell Wasendorf Sr attempts suicide
By David Sheppard and Tom Polansek
NEW YORK/CHICAGO, July 10 Less than nine months
after MF Global's collapse sent shockwaves through U.S. futures
brokerages, news that more than half the customer funds at
Iowa-based PFGBest are missing is threatening to shatter the
fragile confidence in the industry.
PFGBest on Monday told its foreign exchange and commodities
customers that their accounts had been frozen after an apparent
suicide attempt by its chairman. A few hours later, an industry
body said about $220 million in customer funds were not in the
brokerage's bank accounts.
While PFGBest was less than one-tenth the size of MF Global,
the fallout may be larger. If the National Futures Association's
report on the missing funds proves accurate, questions about the
safety of the brokerage model and whether regulators have again
been found wanting are inevitable.
"It's déjà vu all over again," said John Roe, co-founder of
the Commodity Customer Coalition (CCC), set up in the aftermath
of MF Global's collapse last October to help clients regain
their money. In its dying days, MF Global had been accused of
dipping into customer funds to help meet margin calls.
"Everyone in the industry claimed this couldn't happen
again, but if the money really is missing then it's like a
repeat of MF Global. Anyone who thought things don't need to
change, well, have to reappraise their position," Roe added.
The PFGBest disclosure came hours after owner Russell R.
Wasendorf Sr, a 40-year veteran of futures markets, was found in
his car near the company's Iowa headquarters, having apparently
attempted to commit suicide. He is in critical condition at the
University of Iowa Hospitals, according to local news reports.
It is not clear what has happened to the missing funds.
PFGBest officials were not immediately available to comment.
Local law enforcement officials said the investigation would
likely pass to the U.S. Attorney's Office shortly.
The shock was twofold for many in the tight-knit trading
industry, who struggled to reconcile the apparent suicide
attempt with the well-regarded industry veteran known for his
hometown philanthropy and passion for peregrine falcons.
"I always thought they were straight shooters," said Mark
Melin, an author and futures-industry consultant, who worked for
the Wasendorfs at PFGBest for about two and a half years as a
managed futures broker.
"I know them personally, I watched them operate. I'm
reserving judgment until the officials come out with definitive
Others expressed less shock.
One former employee of the firm said he had grown concerned
that Wasendorf didn't do more to distance the company from a
massive $194 million forex-trading Ponzi scheme run by Trevor
Cook in Minnesota, who admitted defrauding more than 700
investors. Cook is serving 25 years in prison.
In February, PFGBest, which had acted as Cook's broker, was
fined $700,000 by the NFA for failing to notice the scheme. The
company was subsequently sued for $48 million by the receiver
rounding up the assets from Cook's scheme.
"They never admitted they were aware what was going on, but
they didn't deny it either," said the former employee.
Wasendorf's son, Russ Wasendorf Jr, briefed employees on
Monday. One employee said he sounded "extremely depressed,
"I would say he probably didn't have any idea this was going
on," he said.
Many PFGBest employees contacted by Reuters said they expect
the firm to fold. One said PFGBest is "doomed".
PFGBest was among the firms that scrambled to reassure
customers of the safety of their funds last November just after
MF Global's collapse, posting a notice that said the firm
"reports daily and monthly to regulators concerning customer
segregated accounts." A number of former MF Global customers
also moved their trading accounts to PFGBest.
But by November, it seems, funds at the Iowa brokerage were
already missing. The NFA said in Monday's letter that previous
customer account balances from February 2010 and March 2011
reported by the firm may have been inflated by as much as $190
million, with PFGBest only holding $10 million of a claimed $200
In the letter, it said PFGBest clearing unit Peregrine
Financial Group (PFG) had told the NFA just two weeks ago that
it held $400 million in customer segregated funds, of which over
$225 million was on deposit at the firm's bank.
But on Monday, after receiving information that PFG's
founder and owner may have falsified bank records, the NFA said
that only $5 million was on account at the bank days earlier.
"We had personal assurances from Wasendorf senior as
recently as two weeks ago that they were not like MF Global,"
said Lauren Nelson, director of communications for Attain
Capital, an introducing broker specializing in managed futures
"We've been speaking to other FCMs (Future Commission
Merchants) in the hope we can eventually transfer our accounts
over. But the fear is the funds are gone - the regulators have
really dropped the ball."
Unlike the securities markets, customers of futures brokers
do not enjoy any government or industry-backed insurance scheme
in the event funds are stolen or go missing.
In the wake of the MF Global collapse last year, exchange
operator CME Group set up an insurance fund that covers farmers
and ranchers for up to $25,000 and cooperatives for as much as
$100,000 when a clearing member fails.
CME did not immediately respond to a question about whether
the fund would kick in for PFGBest.
While the Commodity Futures Trading Commission (CFTC) has
taken some small measures to toughen up rules protecting
customer accounts, investors have said they may not be
sufficient to fully restore faith in the industry.
A joint review of the 70 largest Futures Commission
Merchants (FCMs) by the CFTC and NFA in January said they found
no "material breaches of customer funds protection requirements
during the spot check," leading traders to question how thorough
the review was.
"You would think that the government would be watching these
accounts and doing something," one PFGBest employee said.
"The NFA can't regulate this industry."
FROM BASEMENT TO COMPOUND
PFGBest is far smaller than the big broker-dealers that
dominate the futures trading business, but was among a dozen or
so well-known independent firms that tended to cater to local
traders, farmers, wealthy individuals or smaller market players.
Wasendorf Sr, who started as a commodities trader in the
basement of his Cedar Falls home in 1972, used a windfall profit
from the "Black Monday" stock market meltdown in 1987 to expand,
formally launching the predecessor of PFGBest in 1992.
The firm grew significantly over the past decade, opening
offices in Canada and Shanghai, and buying smaller rivals.
In 2009, Wasendorf moved the firm's headquarters from
Chicago back to a purpose-build facility in his hometown of
Cedar Falls - a 50,000 square-foot, three-story glass
headquarters that cost $18 million and was celebrated for its
eco-friendly construction, geothermal climate control and
four-star employee cafeteria.
The former employee said there was a "messianic" quality to
Wasendorf's desire to shift operations to his home town,
describing the new building as a "compound" but also
acknowledged a practical aspect to the move.
"A large part of trying to move everything to Iowa was about
slashing costs. It's obviously a lot cheaper to hire someone in
Iowa than it is in Chicago," he said.
The industry has come under enormous strain lately as
ultra-low interest rates sap revenue from holding customer
funds, while electronic trading threatens their role as
James Koutoulas, a hedge fund manager who became the
figurehead for MF Global customers after co-founding the
Commodity Customer Coalition with Roe, said he didn't think the
futures broker model is irreparable but warned many were losing
"It's a crisis of confidence," Koutoulas said.
"For the futures market it's horrible," he added, saying his
clients had nine accounts with PFGBest.