The US futures industry reeled on Tuesday as Iowa-based broker PFGBest collapsed after regulators accused it of misappropriating customer funds for more than two years, dealing a new blow to trader trust just months after MF Global’s demise.
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 US$200 million.
“The whereabouts of the funds is currently unknown,” the CFTC said in a complaint against PFG and its founder and chairman, Russell Wasendorf Sr, whose suicide attempt on Monday morning outside the firm’s Cedar Falls, Iowa, offices appears to have precipitated the crisis.
On Tuesday evening, Peregrine filed to liquidate under Chapter 7 of the US bankruptcy code, with between US$500 million and US$1 billion of assets, between US$100 million and US$500 million of liabilities, and between 10,000 and 25,000 creditors. The Chapter 7 filing suggests the company is winding down.
The funds shortfall represents more than half of PFGBest’s client accounts, but is modest relative to the estimated US$1.6 billion missing from MF Global’s accounts.
As details of the scandal became clear, the circumstances 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 US Bank, PFG’s bank, a person close to the situation said. 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, who declined to be identified.
The CFTC complaint — which relies on many of the details released on Monday by the National Futures Association (NFA), the broker’s main regulator — said the bank account that PFG reported was holding US$225 million in 1,845 customer accounts, actually contained only US$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 began to unravel as the NFA shifted to electronic confirmations.
The 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.
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.
The filing showed that Russell Wasendorf Jr, the founder’s son, had been empowered to act for Wasendorf Sr in the event the latter became incapacitated, under a power of attorney dated July 3.