* 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
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
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
"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.