Second Scandal Rocks Futures Industry

Published July 10, 2012

Nine months after the collapse of MF Global rocked the commodities futures market comes news of a similar scandal involving Peregrine Financial Group, Inc. of Cedar Falls, Iowa and Chicago, where $220 million in customer funds apparently have gone missing.

A tip to the National Futures Association led the organization to contact a bank where PFG claimed to have $225 million of customer funds on hand. The bank reported PFG had only $5 million on deposit. PFG is a “futures commission merchant” that handles commodities futures trades for clients.

The NFA has effectively shut down the company’s activities except as needed to liquidate customer accounts.

Decades-Long Fraud

The news broke July 9, the same day PFG Chairman Russell R. Wasendorf Sr. reportedly attempted suicide.

On July 10 the Commodity Futures Trading Commission filed a lawsuit accusing Peregrine Financial and Wasendorf of fraud, customer funds violations, and making false statements.

The NFA is an industry self-regulatory body. The CFTC is a government agency.

Four days after Wasendorf’s suicide attempt the FBI released a copy of a suicide note he allegedly wrote. It reads in part, “Through a scheme of using false bank statements I have been able to embezzle millions of dollars from customer accounts at Peregrine Financial Group, Inc. The forgeries started nearly twenty years ago and have gone undetected until now.”

“These companies are supposed to segregate customer funds from their own funds and account for them and meet certain capital requirements. Nobody knows what happened to the money. PFG didn’t appear to have the big margin calls on their own portfolios that MF Global had,” said Jeff McKinley, a certified public accountant and president of Senex Solutions LLC, a Chicago-based firm that provides accounting and administrative services to hedge funds and proprietary trading firms.

“This is a huge blow to the futures industry,” McKinley said.

‘Failing in Their Responsibility’

MF Global went bankrupt last October, with approximately $1.6 billion of customer funds missing. A trustee is working to recover the funds. The company lost big on bets on European debt.

“With these PFG and MF Global scandals it is blatantly obvious that regulators are failing in their core responsibility of protecting client funds,” McKinley said. “I used to be an auditor. One of the primary tools auditors rely on is independent confirmation — directly contacting the bank. It appears they didn’t do that until after receiving a tip. It’s unbelievable.”

Later news reports quoted unnamed sources in the investigation alleging Wasendorf set up a post office box that he told regulators was the bank’s address. This enabled him to intercept mail from regulators and respond with falsified information.

The failures of MF Global and PFG are part of a string of high-profile regulatory failures in recent years, the most prominent being the multibillion-dollar collapse of a Ponzi scheme run by Bernie Madoff.

In 2009 Madoff pleaded guilty to 11 felonies related to his wealth management firm which cheated thousands of investors out of amounts estimated to be as much as $20 billion, making it the largest financial fraud in US history. He is serving 150 years in federal prison.

Ten years before the collapse of his scheme, an independent financial analyst named Harry Markopolos contacted the Securities and Exchange Commission with evidence that Madoff was running a massive fraud. Repeatedly over the next 10 years Markopolos presented evidence to federal regulators but was ignored.