By Charles Rotblut
Nine months after the collapse of MF Global, another futures trading firm has imploded. Peregrine Financial Group (PFG), also known as PFGBest, filed for Chapter 7 in federal bankruptcy court on Tuesday. The filing occurred a day after the firm’s founder, Russell Wasendorf Sr., attempted suicide. Wasendorf is accused of misappropriating customer funds, making false statements and fraud.
Details of what happened are still emerging, but the National Futures Association alleges that PFG claimed to have in excess of $220 million in customer accounts, when it actually only held $5.1 million. Wasendorf is said to have falsified bank statements as far back as February 2010. Regulators discovered the discrepancy while researching the company’s possible involvement with a Minnesota Ponzi scheme.
The debacle extends beyond PFG. Wasendorf owned several other businesses, including SFO Magazine and W&A Publishing/Trader’s Press. These businesses have been shut down. (The Des Moines Register says 125 people who worked for Wasendorf’s various businesses have lost their jobs.) The implosion also directly affects me because W&A Publishing is the publisher of my book, “Better Good Than Lucky.” My book is now in limbo because although I own the copyright, W&A Publishing holds the license to publish it. (And with no publisher, there is no way to replenish bookstore inventories.) Though I’m not happy, I feel worse for the people I knew at Wasendorf’s companies who lost their jobs.
So what happens now to PFG? Customer accounts are frozen and PFG is being liquidated. Wasendorf’s other companies will probably be liquidated as well. As of yesterday, a trustee for PFG had yet to be named. It will likely be a while before PFG customers know how much money they will get back.
Had this been a traditional brokerage firm, as opposed to a futures firm, the outcome for investors would be different. The
Securities Investor Protection Corporation (SIPC) returns cash,
stock and other
securities when a brokerage firm fails. Should a brokerage firm go bankrupt, the SIPC returns the assets held in the account, typi
cally within one to three months. There are limitations and the SIPC does not protect against bad investments (or bad investment advice), only failed brokerage firms. More information can be found on the
SIPC’s website.
The bigger question is why didn’t regulators catch this alleged fraud sooner, especially in the wake of MF Global? News reports say PFG had been investigated before, including for complaints about the handling of customers’ money. Yet, it does not appear that regulators pushed for electronic verification of account funds with PFG’s bank until the missing money was discovered on Monday, the same day that Wasendorf attempted suicide. Rather, Wasendorf allegedly sent doctored bank statements, from a post office box he controlled, to regulators. And regulators accepted those statements as being factual.
Clearly, the National Futures Association and its overseer, the
Commodity Futures Trading Commission, need to be more aggressive about how they monitor futures firms to ensure customer money is being
handled properly. Reuters reported
last night about a plan to force executives to sign off on major withdrawals from customer accounts. This a positive step, but it does not go far enough to catch the actions of malfeasant executives. Rather, a more aggressive monitoring process that includes routine electronic verification of account balances is needed.
The Week Ahead
More than 60 members of the S&P 500 will report
earnings next week. Included in this group are Dow components The Coca-Cola Company (KO) and Johnson & Johnson (JNJ) on Tuesday;
American Express (AXP) and Bank of America (BAC) on Wednesday; and Microsoft (MSFT) and The Traveler’s Companies (TRV) on Thursday.
The week’s first economic reports will be June retail sales, the July Empire State manufacturing survey, and May business inventories, all of which will be published on Monday. Tuesday will feature the June
consumer price index (CPI), June industrial production and manufacturing capacity, and the July National Association of Homebuilders’ housing price index. June housing starts and business permits and the periodic Federal Reserve Beige Book will be published on Wednesday. Thursday will feature June existing home sales, June leading indicators and the July Philadelphia Fed survey.
Federal Reserve Chairman Ben Bernanke will give his semiannual monetary policy testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.
The Treasury Department will auction $15 billion of 10-year in
flation-protected securities on Thursday.
About The Author – Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky.
The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.
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