MF Global redux: CFTC says Iowa broker misused over $200 million

Tue Jul 10, 2012 2:48pm EDT
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By David Sheppard and Tom Polansek and Alexandra Alper

NEW YORK/CHICAGO/WASHINGTON (Reuters) - The U.S. futures trading industry reeled on Tuesday as federal regulators accused Iowa-based broker PFGBest of misappropriating over $200 million in customer funds for more than two years in an alarming echo of MF Global's collapse.

The Commodity Futures Trading Commission (CFTC), which had give a clean bill of health to dozens of brokers in January, said that the firm's regulated Peregrine Financial Group (PFG) unit and its owner had failed to maintain sufficient capital in segregated accounts since at least February 2010.

It also said the broker lied to regulators in order to hide the shortfall, which now stands in excess of $200 million, more than half of the broker's total client funds.

"The whereabouts of the funds is currently unknown," the CFTC said in a complaint against the PFG and its founder and chairman, Russell R. Wasendorf Sr., whose apparent suicide attempt on Mon day morning outside the firm's Cedar Falls, Iowa, offices appears to have triggered the crisis.

The shortfall is modest relative to the estimated $1.6 billion missing from MF Global's accounts, but news of a second broker violating sacrosanct segregated customer funds threatens to shatter the fragile confidence in the industry which once prided itself on an unblemished record in protecting client money.

Wasendorf, 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 filing said.

The complaint relies on many of the details released on Monday by the National Futures Association (NFA), the broker's first line regulator, which discovered during an audit that a U.S. bank account that PFG reported was holding $225 million in 1,845 customer accounts actually contained only $5 million.

As customers faced the prospect of millions of dollars in losses, or at a minimum a lengthy wait for the return of frozen funds, traders were quick to call for better regulation to protect their funds. While a dozen new measures had been proposed after MF Global's bankruptcy, few have been implemented.   Continued...

A trader working in the crude oil and natural gas options pits on the floor of the New York Mercantile Exchange in New York August 8, 2011. REUTERS/Shannon Stapleton