The Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) have taken action against Peregrine Financial Group, also called PFGBest, a Cedar Falls, Iowa-based broker, after the discovery that client accounts that should have held $225 million only contained $5 million. In addition, the CFTC is said to be on the verge of approving the “Corzine rule” in the wake of the money’s disappearance.
The Omaha division of the FBI is investigating the matter, with the Chicago division possibly becoming involved as well. The National Grain and Feed Association was “infuriated” and demanding answers as members, many of whom had already been hit by the fall of MF Global, stood to suffer yet another financial blow as trust in markets plunged. Alarm bells should have sounded, say experts, at the firm’s use of a tiny auditor operating out of a private home.
And in an odd personal note, it was learned that PFGBest founder Russell Wasendorf Sr. (left), who had sent out invitations to a planned local wedding with his fiancée Nancy Paladino, had actually already married Paladino in Las Vegas on June 30—just three days before he signed over power of attorney to his son.
In what is seen as a black eye for the CFTC and NFA, the regulators had given a clean bill of health to PFGBest and numerous other firms in January, after undertaking an industrywide review of the 70 largest futures commission merchants to reassure clients after the collapse of MF Global in October, which was run by former New Jersey Gov. Jon Corzine, Reuters reported Tuesday. The New York Times reported that the money was discovered to be missing on Monday by the NFA, which stopped operations at the firm; that evening, Wasendorf Sr. attempted suicide outside the firm’s offices in his car. On Tuesday the firm filed for Chapter 7 bankruptcy.
At the time of the review, the CFTC said it found no “material breaches of customer funds protection requirements.” Gary Gensler, chairman of the CFTC, said in the report on Tuesday that the review was conducted by the NFA and was not equivalent to a full-scale audit. The same day, the CFTC filed suit against Peregrine Financial Group and owner PFGBest, charging fraud, failure to segregate client funds and the making of false statements. It has also asked a federal court to appoint a receiver for the firm and freeze its assets.
On Thursday the CFTC was reported by unnamed sources to have already gotten three votes in favor of implementing the “Corzine rule,” proposed by the NFA, which would require top executives at futures brokers to sign off on major withdrawals from customer accounts. The rule has been under consideration since May, but seems to have found new life in the wake of the PFGBest scandal.
In the bankruptcy filing, Peregrine Financial Group was shown to have $500 million to $1 billion in assets, $100 million to $500 million in liabilities, and 10,000 to 25,000 creditors. A board resolution to authorize the filing was signed by President Russell Wasendorf Jr., who also signed on behalf of Chairman Russell Wasendorf Sr. A power of attorney dated July 3 empowered Wasendorf Jr. to act for Wasendorf Sr. should he become incapacitated.
According to a CNBC report on Thursday, “an apparent suicide note found in Wasendorf Sr.’s vehicle indicated possible accounting discrepancies at the firm, according to a police report. Authorities will not discuss Wasendorf Sr.’s condition, but a local newspaper, quoting unidentified sources, reported he is alert and responsive at an Iowa hospital, and possibly able to shed some light on the bizarre events leading up to the firm’s collapse.”
In its complaint, the CFTC said that records had been falsified as far back as 2010. Reuters reported that, according to a confidential source close to the situation, Wasendorf Sr. intercepted confidential regulatory documents mailed by the NFA to a post office box he had set up. The NFA had been led to believe that the address belonged to U.S. Bank, which was PFG’s bank. Instead, the documents, which were used to independently verify a broker’s bank balances, went to Wasendorf Sr., who forged signatures, made up bank balances, and sent the forms back to the NFA. He also stalled on signing off on electronic confirmations, which would have revealed the shortfall much more quickly.
Dozens of large farm-related businesses among the grain trade group’s members, which include more than 1,000 grain elevators, food processors and exporters, were hit with massive losses by the failure of MF Global in October. This fresh blow has NGFA members steaming—particularly at regulators.