Suit alleges roughly $200 million of segregated customer funds missing

Jul 13, 2012
by DTN

Roughly $200 million of segregated customer funds are missing from the bank accounts of Peregrine Financial Group (PFG), a brokerage firm based in Cedar Falls, IA, and Chicago, the Commodities Futures Trading Commission (CFTC) alleged in a lawsuit filed last Tuesday morning.

CFTC alleged PFG failed to segregate customer funds such as margin money used to secure futures market positions, falsified documents, and committed fraud by misappropriation. PFG represented that its segregated account held close to $225 million, but the balance was actually only $5.1 million, according to the lawsuit. The lawsuit also shows that the shortfall isn’t a new development: In February 2010, the futures commodities merchant reported it had $207 million in its customer segregated account, but the actual account balance was less than $10 million.

The shortfall was discovered last Monday, after PFG’s owner and founder, Russell Wasendorf Sr., was taken to the hospital after an apparent suicide attempt. Shortly after, the National Futures Association (NFA), the group responsible for monitoring and auditing PFG’s compliance with CFTC regulations, was notified that Wasendorf may have falsified documents. NFA issued a notice last Monday evening. All open customer positions were liquidated by Jefferies Group Inc., PFG’s clearing firm, but customers can’t withdraw their assets.

CFTC has requested a restraining order against the firm’s principal operators and asked the court to appoint a receiver to take over the business.

It’s still unclear how much of PFG’s business was agriculture related or how many clients’ funds were involved. But one thing’s clear: Farmers, traders and industry participants’ confidence in the futures market, particularly its regulators, hasn’t healed after $1.6 billion of customer funds went missing from MF Global’s segregated customer funds.

“It is absolutely imperative that there is accountability in the futures markets so customers can feel safe knowing their money is protected,” said Sen. Debbie Stabenow, chairwoman of the Senate Agriculture Committee. “We are working closely with regulators to find out what happened because farmers and small businesses need assurances that their funds are safe from reckless or criminal activity.

Congress also has a responsibility to assess current customer protections and strengthen them where needed to put a stop to executives misusing customer funds in the future.”

Shortly after releasing a statement on the PFG situation, Stabenow’s office announced two related hearings to examine futures-trading regulatory oversight under the Dodd- Frank bill and also to further examine the aftermath of the MF Global debacle. Stabenow has been pushing for better regulation of customer segregated accounts since the MF Global collapse. CFTC passed a rule prohibiting futures commodities merchants from investing segregated customer funds in foreign debt after the downfall of MF Global. The regulatory agency is also considering models of separation to better protect customers.

“If somebody is going to defraud their regulators, effectively lie, we’re going to vigorously pursue that, and that’s what you’re seeing here,” CFTC Commissioner Gary Gensler told Dow Jones Newswires. He said CFTC should pass rules that “further enhance segregation of customer funds” and that CFTC staff is working on “recommendations on enhanced internal controls and transparency” for customer money held by futures firms.

Canadian customers’ funds held at PFG are accounted for, Investment Industry Regulatory Organization of Canada said in a news release. — Katie Micik, DTN