Iowa broker PFGBest collapses after hiding millions

Tue Jul 10, 2012 11:48pm EDT
 
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By Ann Saphir and Alexandra Alper and P.J. Huffstutter

CHICAGO/WASHINGTON/CEDAR FALLS, Iowa (Reuters) - 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.   Continued...