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Iowa Broker PFGBest Collapses After Hiding Millions

In what looks like a mini-Madoff scandal, $200 million is missing as the firm's founder and chairman Russell R. Wasendorf Sr. attempted suicide on Monday.

CHICAGO/WASHINGTON/CEDAR FALLS, Iowa, July 10 - The U.S. 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 $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 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 U.S. bankruptcy code, with between $500 million and $1 billion of assets, between $100 million and $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 $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 afloat.

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 source said, who declined to be identified.

The CFTC complaint, which relies on many of the details released on Monday 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.

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.

"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.

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 Tuesday 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.

The bankruptcy 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.


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 PFG's balance had been steady at around $5 million for several years.


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 on Monday 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.


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.

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.

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