EXCLUSIVE-Spain's bad bank close to big land sale as disposals pick up
* Sareb close to auctioning 350 mln euro portfolio - source
* Nine months after MF Global, fallout may be looks familiar
* Regulator says accounts hold $5 mln, not $225 mln
* PFGBest founder forged bank statements for years-source
By Ann Saphir and Alexandra Alper
CHICAGO/WASHINGTON, July 10 The U.S. futures industry reeled o n T uesday as regulators accused Iowa-based broker PFGBest of misappropriating over $200 million in customer funds for more than two years, a new blow to trader trust just months after MF Global's collapse.
The Commodity Futures Trading Commission (CFTC), which along with industry regulators had given a clean bill of health to dozens of brokers following spot checks in January, alleged that the firm's regulated Peregrine Financial Group (PFG) unit and its owner had defrauded customers and lied to regulators in order to hide a shortfall that now exceeds $200 million.
"The whereabouts of the funds is currently unknown," the CFTC said in a complaint against PFG and its founder and chairman, Russell R. Wasendorf Sr., whose suicide attempt on Mon day morning outside the firm's Cedar Falls, Iowa, offices appears to have precipitated the crisis.
The shortfall represents more than half of PFGBest's client funds but is modest relative to the estimated $1.6 billion missing from MF Global's accounts.
As more details of the scandal became clear, the circumstances began to look more like a Bernard Madoff-style fraud than MF Global CEO Jon Corzine's desperate bid to stay afloat.
Wasendorf intercepted confidential regulatory documents that were mailed by the National Futures Association to what the industry group believed was U.S. Bank, PFG's bank, a person close to the situation told Reuters. Instead, they were sending the documents, used to independently verify a broker's bank balances, to a post office box that Wasendorf had set up, the source said.
The CFTC complaint, which relies on many of the details released o n M onday by the NFA, the broker's main regulator, said the bank account that PFG reported was holding $225 million in 1,845 customer accounts actually contained only $5 million.
Wasendorf forged signatures and fabricated bank balances on the documents and simply mailed them back to the Chicago-based NFA, the person said. The scheme apparently began to unravel as the NFA shifted to electronic confirmations.
NFA "started getting suspicious. He was resisting this new way of confirming the balance," the source said. Wasendorf only recently signed the authorization, a decision that would quickly have led regulators to uncover the discrepancy.
While distinct from MF Global's demise in many ways, news that a second broker has violated sacrosanct segregated customer funds threatens to shatter the fragile confidence in an industry that once prided itself on an unblemished record in protecting client money.
"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 recoup their money. In its dying days, MF Global dipped into customer funds to help meet margin calls, investigators believe.
"Anyone who thought things don't need to change will have to reappraise their position," Roe added.
Wasendorf, 64, a well-known and mostly well-regarded figure in the industry over a four-decade career as a journalist, trader and executive, was reported to be in a coma, the CFTC said. He was found in his car early on Monday morning in an apparent suicide attempt. A spokesman for University of Iowa Hospitals and Clinics said on Tu esd ay he was unable to comment on Wasendorf's status due to federal privacy laws.
A police report released on Tuesday said he had been found "breathing but incoherent" after running a hose from his exhaust pipe into the car. A suicide note found with him alluded to some kind of discrepancies with accounts at PFG, the report said, confirming what the broker had told its clients a day ago.
As customers fumed at the prospect of millions of dollars in losses, or at a minimum a lengthy wait for the return of frozen funds, some said they had been burned for the last time.
Doug McClelland, who runs Plains Commodities, a one-man brokerage in Lincoln, Nebraska, with about $500,000 in accounts at PFG Best, said three of his customers have already sworn off futures trading after first losing money to MF Global.
Initially, the customers said "we'll give it one more shot," McClelland said. Traders and exchange officials have said the collapse of MF Global does not seem to cast a lasting chill over market activity. Now, says McClelland, they feel that "somehow the public's money is becoming a depository for a CEO."
Regulators came under renewed pressure to shore up confidence in the industry as they grappled with the latest in a string of financial debacles to shake Washington this year.
Chairman Gary Gensler cited a handful of measures the CFTC has taken to improve protection for commodity traders, and said the agency relied on the designated self-regulatory agencies like the NFA to be the first line of defense.
But ultimately, he conceded, some deeds may be unstoppable.
"There are still going to be people who do bad things," Gensler said. "There are still going to be people out there that attempt to defraud the public. And that is also why we have a vigorous enforcement effort and pursue actions."
The Omaha, Nebraska, office of the Federal Bureau of Investigation (FBI) said it was investigating the case.
The CFTC on Tuesday asked an Illinois judge to issue a restraining order against both Wasendorf and the firm, and to appoint a temporary receiver for their property.
REGULATORY IRE, CUSTOMER GRIEF, EMPLOYEE DISMAY
A well-known broker for U.S. foreign exchange and commodity markets for 20 years, PFGBest was among a dozen or so mid-sized, independent brokers that scrambled to reassure customers of the safety of their funds after MF Global's collapse.
In February it posted a notice that the firm "reports daily and monthly to regulators concerning customer segregated accounts." A number of former MF Global customers also moved their accounts to PFGBest.
"We had personal assurances from Wasendorf Sr. 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 in Chicago.
"We've been speaking to other (brokers) 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."
But unlike MF Global, which is believed to have misused customer funds in a mad scramble to meet margin calls on proprietary trades in its waning days, PFGBest's abuse seems to have extended back years, according to the complaint. There is no indication yet of how or why the missing money was used.
The CFTC case filed in the U.S. District Court for the Northern District for Illinois, Eastern Division, alleges that PFG failed to segregate customer funds, committed fraud by misappropriation and reported false data to regulators.
The CFTC complaint says that PFG records showed a balance of $207 million in the 1,845 customer segregated accounts as of Feb. 28, 2010, although the actual bank balance was under $10 million. They said that under $10 million was in the account as of March 30, 2011, when PFG records showed a balance of $218 million. The balance was just $5 million this week, it said.
The NFA order said the accounts were held at U.S. Bank. A source familiar with the situation said that PFG's balance had been steady at around $5 million for several years.
Some have advocated adopting a government or industry-backed insurance program that would protect futures traders, similar to a scheme that has long existed for securities investors.
But Iowa Senator Chuck Grassley, a senior Republican and member of the Agriculture Committee, said it was premature to start talking about an indemnity fund or changes to the law.
"Right now, I'd like to concentrate on whether the regulators are doing their job," he told reporters.
Much of the early criticism is already falling to the CFTC, which said it found no "material breaches of customer funds protection requirements" during a joint review of the 70 largest FCMs with the NFA in January.
JEFFERIES LIQUIDATES POSITIONS
On Tuesday, the firm's clearing broker Jefferies Group Inc , which was responsible for clearing trades through exchanges like those run by CME Group, said it had begun unloading positions held on behalf of PFG's clients after it failed to meet a margin call. It said a "substantial portion" had already been closed and it did not expect to incur losses.
As a "non-clearing" futures commission merchant (FCM), PFGBest acted as a middleman for mostly small-scale or retail traders, passing those trades to Jefferies to clear.
Because it was not a clearing member of the CME, a not-uncommon arrangement for smaller brokers that do not want or are unable to keep enough capital of their own, the regulatory burden falls to the NFA and the CFTC, letting the CME Group -- which suffered harsh criticism as the front-line regulator of MF Global -- off the hook.
PFGBest officials have said nothing beyond a notice to clients o n M onday confirming an investigation into "accounting irregularities" and advising customers that they could liquidate open trading positions but would not be able to withdraw cash or initiate any new trades.
For the company's several-hundred employees, some of whom had already packed up, the mood was somber.
"It's like a wake here. Everybody is scrambling trying to find a job in this economy; it's not so easy," said one broker in Chicago. "It's the reality of life. There is a lot of greed in this world. And I am on the wrong side of it this time."
The shock was twofold for many in the tight-knit trading industry, who struggled to reconcile the apparent suicide attempt with the 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 PFGBest for about 2-1/2 years.
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.
Others expressed less shock.
One former employee of the firm said he had grown concerned that Wasendorf did not 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 of what was going on, but they didn't deny it either," said the former employee.
Others wondered about Wasendorf's decision to move the firm's headquarters from Chicago back to his hometown of Cedar Falls, occupying a 50,000 square-foot, three-story glass headquarters that cost $18 million and was celebrated for its eco-friendly construction and four-star cafeteria.
It was a sizeable investment for an industry that has come under enormous strain lately as ultra-low interest rates sap revenue from holding customer funds and electronic trading threatens the role of middleman.
* Sareb close to auctioning 350 mln euro portfolio - source
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