PFG Best: Bank Documents Intercepted?

Wasendorf intercepted these documents after they were mailed by the NFA, the broker's first-line regulator, to U.S. Bank, where PFGBest had said it had well over $200 million on deposit, the person said. The NFA has said the account actually held just $5 million this week.
Wasendorf had set up a post office box in Cedar Falls, Iowa, according to a second person involved in the matter. It was to that post office box that NFA sent the documents, which were addressed to the bank.
The post office box was neither in Wasendorf's name nor registered to the bank, the second person said.
Wasendorf then forged signatures and fabricated bank balances on the documents and simply mailed them back to the Chicago-based NFA, the person said.
....
In a complaint filed on Tuesday alleging fraud, misuse of customer funds and making false statements to regulators, the Commodity Futures Trading Commission said the discrepancy between PFGBest's reported balance and its actual cash had been going on since at least February 2010.

February 2010?!

So let's see.

We have a Madoff-style scam here rather than a Corzine one (or is it? Remember, Corzine's firm may well have been in trouble for quite some time, according to many -- including Janet Tavakoli!) not that this will provide any comfort to the customers who got robbed blind.

This still leaves the obvious question open: Where were the auditors and accountants?

Yeah, I know, the NFA allegedly was "monitoring" balances and was "scammed." But here's the problem, from my point of view -- how the hell do you get duped for two+ years like this without some sort of willful blindness and/or just crap for controls and procedures?

Everyone knows the first thing you look at when you're verifying a company's claims is the bank balance. And you get it directly from the bank too -- you call them, if you have to.

There's another problem with the so-called "verifications" here as well -- balances are called "balances" because, well, they balance. Which means there's a series of transactions in and out.

How do you get an allegedly forged balance to total out on the ledger unless you also forge all of the line items in the journal? It would be veryhard to do this and not get caught if anyone bothered to look at the transaction-level detail.

Which means nobody did.

For more than two years.

Which means nobody is looking at the ledgers at any of the other firms out there either.

Think about that last line for a while, and exactly how much "regulation" and "monitoring" is going on at these firms just might sink in.

http://market-ticker.org/akcs-www?post=208410

and....

http://www.zerohedge.com/news/pgf-files-chapter-7

PGF Files Chapter 7

Submitted by Tyler Durden on 07/10/2012 21:01 -0400

Bankruptcy Code

Bloomberg News

Creditors

The natural and sad end to every fraud: liquidation (and even sadder for the10-25K creditors of the company who will get nothing as a result of this liquidation proceedings).

Peregrine Financial Group Inc, the regulated unit of the brokerage PFGBest, has filed to liquidate under Chapter 7 of the U.S. bankruptcy code, a court filing shows.

Tuesday's filing with the U.S. bankruptcy court shows that Peregrine has between $500 million and $1 billion of assets, between $100 million and $500 million of liabilities, and between 10,000 and 25,000 creditors.

A board resolution authorizing the bankruptcy was signed by President Russell Wasendorf Jr, who also signed on behalf of Chairman Russell Wasendorf Sr.

The resolution said Russell Wasendorf Jr was empowered to act for Russell Wasendorf Sr in the event the latter became incapacitated, under a power of attorney dated July 3.

Russell Wasendorf Sr attempted suicide on July 9.

And via Bloomberg, this is how he tried to kill himself:

Thompson said in a phone interview today that Wasendorf was found in his car with a note, the contents of which the sheriff declined to divulge. A hose ran from the vehicle’s exhaust pipe into the passenger compartment, he said.

An officer with the sheriff’s office arrived just after 8 a.m. yesterday at Peregrine offices, where paramedics were attending to Wasendorf, according to an incident report e-mailed to Bloomberg News.

Wasendorf was breathing as he was taken from his car and was incoherent, according to the report. He was later airlifted to University of Iowa Hospitals in Iowa City, it said.

“A note was found in the vehicle that indicated possible discrepancies with accounts at Peregrine Financial Group,” according to the report.

There is now a receiver:

Pallmeyer’s order today prohibited the destruction of the firm’s books and records and granted the CFTC’s request for access to inspect them. She also appointed a receiver, Michael M. Eidelman of Chicago’s Vedder Price PC, placing him in charge of the business.

“Until further order of the court,” she said, “the receiver’s compensation is limited to $25,000 to be satisfied first out of available assets of defendant Russell R. Wasendorf Sr. and then from available assets of defendant Peregrine Financial Group Inc.”

Many more to come.

http://managed-futures-blog.attaincapital.com/2012/07/10/pfgbest-broken-promises-shattered-trust/

PFGBest: Broken Promises, Shattered Trust

JULY 10, 2012 BY ATTAIN CAPITAL 4 COMMENTS

inShare17

This week’s newsletter was supposed to be a spotlight of one of our top ranked managers- a celebration of research, innovation, performance and risk management. Instead, we find ourselves staring at a blinking cursor on our screen with a mix of disbelief and rage.

When we originally penned our white paper, How to Save the Futures Industry, we had no idea that we would be staring down the same deficiencies less than a year later. Today we learned that PFGBest has had a customer fund shortfall amounting to approximately $220mm (perhaps dating back to 2010). As the story has unfolded, the details have been at turns nauseating and infuriating, as a web of deceit unravels before our eyes.

MF Global had us angry, but this time, it’s personal. Our clients have money with PFGBest. We have money with PFGBest. We were misled by senior leadership that we trusted in business. We were let down by regulators. We were failed by our government.

Enough is enough. Here, we’ll break down what we know so far, the possibilities on the horizon, and the swift, decisive action necessary to keep this travesty from becoming the final nail in the coffin of a marketplace that serves as a heartbeat of our global economy. Because, to borrow a phrase from Captain John Paul Jones, we have not yet begun to fight.

The Breakdown

PFGBest is a non-clearing FCM based in Cedar Falls, Iowa. Prior to today, the firm had roughly $440 million in assets- at least, on paper. It was certainly a smaller firm compared to the MF Global’s of the world, but we had always received excellent customer service from them. The firm was buzzing over Wasendorf’s August nuptials.

After MFGlobal, Attain began enhanced due diligence on the FCMs with whom we have relationships. During this time, we had multiple conversations with both Wasendorf and other executives with PFGBest, where all questions were answered satisfactorily. The firm was in compliance with the NFA and CFTC, and had shored up our confidence with the right responses and attitude. They were a firm focused solely on futures and forex clearing, and beyond that – weren’t has tied to short term interest rates with their slightly different model of providing ‘product’ to their customers at slightly higher revenue.

However, because of the way MF Global played out, we also committed ourselves to enhancing the ongoing due diligence process for our FCM relationships. After all, due diligence is not a one-time conversation. Again and again, we were assured of the firm’s health and compliance, even after they were smacked with a hefty fine and lawsuit over their forex dealings. Those who have been in the futures industry long enough will tell you that any FCM that’s been around for longer than a blink has at least one of these on their record, necessitating contextualization in their consideration, and after hearing from several within the company that the lawsuit was “frivolous” and checking with our own attorney’s on the possible effects of having to pay the entire fine – we did not feel immediate action was necessary with our accounts there, though we did begin establishing additional FCM relationships in addition to the backups we already had in place.

It was around 2:30 PM on Monday that the calls started. Initially, it was another industry participant who wanted to know if we’d heard the news- PFGBest had been put on liquidation only following an apparent suicide attempt by Wasendorf. The story, in our minds, seemed absurd, but before we could even get off the call, other FCMs were calling, offering their support in our time of need. We tried calling the trading desks at PFGBest, and hit a continuous busy line. After finally making contact with members of other departments at PFGBest, the rumors were confirmed. Russ Wasendorf Sr. had attempted to commit suicide, and the firm was, indeed, on liquidation only.

At 3:09 PM, we received the following email:

We began to prepare the necessary paperwork for a bulk transfer of our customer accounts to another FCM, talking with other FCMs we work with to see who could facilitate the transfer the easiest. In the meantime, we called our contacts throughout PFGBest, hoping for more clarity. Here we learned that one of the Iowa PFG employees had seen from her office window that Wasendorf’s car was parked in the company lot in a different place than it should have been. Wasendorf’s son was notified of the irregularity, and upon going down to the car found his father locked in his car with a tube attached to the exhaust in an apparent suicide attempt. The suicide note indicated something along the lines that they would find an accounting error in the company books

At first, we had hoped, especially knowing Wasendorf, that the “error” would be (relatively speaking) small- perhaps relating to his personal trading account or some kind of tax discrepancy. It wasn’t long before the NFA released a report that quashed those hopes. It contained the following affidavit:

There was no misunderstanding. Fraud was committed. PFGBest had submitted false confirmations of account balances. And segregated funds- ours and that of our clients- was missing. Those we spoke with at PFGBest claimed they had been taken off-guard just as much as we had, and we then heard reports that, following a staff meeting this afternoon, some employees began to pack up their desks.

As of last night, we had granted our managers discretion in choosing whether or not to liquidate positions. As of this morning, we’ve received word that Jeffries raised margin requirements for all PFGBest accounts, knowing the firm could not meet the financial obligations and it would force the positions into liquidation. The following email was received this morning:

And all of this a mere months after Wasendorf, Jr. promised the world that PFGBest was no MF Global.

Missed Opportunities

The situation right now is fuzzy at best. We don’t know where the $220mm is, and we likely won’t for days at a minimum. We don’t know whether the situation will be handled via receivership, a la REFCO, or like a Broker Dealer bankruptcy via SIPC as MF Global was (please don’t do that again). What we do know is that this catastrophe is the inexcusable consequence of deceit and ineptitude.

It was eight months ago that we laid out the steps that needed to be taken to set the futures industry back on track, and despite the best efforts of many a well intentioned futures markets participant, very few have been taken. Since the message has clearly not been received, let’s revisit the changes we need, shall we? Maybe this time, people will listen.

Extend SIPC protection to futures investors.

SIPC protection is currently only offered to securities customers- meaning only those trading stocks and bonds are covered in the case of their broker losing their money through a bankruptcy. In our minds, there is zero reason why investors in traditional asset classes should be afforded such protection while investors in the alternative space are not.

As such, we propose that regulations governing the SIPC be amended to ensure protection of futures clients’ holdings as well, with guarantees on the individual account level (the sub-account of the customer segregated account on the FCM’s books) and not just the main overall account level containing all of the customer funds.

The CME and ICE should cut 10% off their marketing budget and put that to lobbying Congress for this protection. This isn’t 1970, when stocks and bonds were the only game in town. If the world turns to the CME to manage risk, the CME needs to turn to Congress to lower the risk of managing that risk. While there was some discussion in the months that followed the MFGlobal collapse of creating an entity similar to SIPC for futures investors, no action has been taken, leaving PFGBest clients wondering what comes next- ourselves included.

Establish regulation outlining standard operating procedures in the wake of an FCM bankruptcy.

Part of the reason that the MF Global situation was so chaotic was the result of poor planning. Positions were stuck in limbo. There was no infrastructure for facilitating an orderly transfer of accounts, which led to an ad-hoc distribution among arbitrarily selected FCMs without the transfer of legal documents- including those necessary for a CTA to trade on behalf of a client. Without any stipulations regarding timeframe, the process was drawn out to the detriment of all parties involved. Add to that a failure to effectively communicate what was going on to the clients involved, and it’s no wonder the situation turned into the nightmare it did.

In the wake of both the Refco and Sentinel scandals, one would think that remedies would already have been put into place for such administrative Bermuda Triangles, but unfortunately, that did not occur. In order to prevent such a disorderly dissemination from occurring again, we suggest that new regulations be developed; outlining exactly what is to happen in the event of an FCM going bankrupt. The old plan seemed to be, wait for a suitor to step up and take on all of the accounts. That clearly worked out wonderfully this time around. Coming up with standard operating procedures outlining the immediate impact on open positions, where the client funds are to be transferred to and within what timeframe, and so forth would help avoid the confusion we’ve seen to date.

This was probably the easiest change we proposed, but steps have yet to be taken to even draft such procedures.

We’ll add a new twist to this solution, saying that such a blueprint or plan should also cover what to do in the case of an FCM being found to have a shortage in customer funds.

Establish regulation under which language must be added to all creditor agreements for any registered FCM in which those creditors agree to the assignment of the customer segregated accounts as the primary lien holder on all assets of the company.

Under current provisions, segregated accounts are given what is, in our minds, inadequate protection during the bankruptcy process. True, their accounts cannot be tapped to meet outstanding financial obligations of the bankrupted FCM, but there’s also no guarantee of those funds being made whole in the event of a shortfall, nor protection from a too big to fail bank like JP Morgan sending in armies of attorneys arguing that their claim should take precedence over the customers. While clients may, after a pro-rata distribution, file a claim with the Trustee in an attempt to get their missing money back, it appears that there are back door methods for big creditors like JP Morgan Chase and those who held MF Global bonds to get in front of the customers in the claims process. As TheStreet summarized:

“The group of customers, led by James Koutalas, chief executive of a Chicago-based commodities trading firm, are taking issue with a lien and other protections offered to JPMorgan in exchange for a $8 million loan the bank extended to MF on the first day of its bankruptcy, according to the report. That would allow JPMorgan the right to some assets over other creditors.”

In our minds, segregated account holders should absolutely come first in the claims process. Unlike the creditors and bold holders, who knowingly accepted the risk of default when they handed over their money, MF Global clients were paying MF Global to hold their funds- not lose them. With this in mind, we believe that the law must designate segregated accounts as the primary creditor if an FCM goes belly up, ensuring that, should there be a shortfall in client segregated funds, available assets of the bankrupt FCM will be tapped to make those accounts whole before any other creditor gets their day in court.

Again, a missed opportunity in the industry. There is no such protection here. In the MF Global case, founder of the CCC, James Koutoulas, indicated that the declaration of bankruptcy by the securities side of the business helped enable JPMorgan to stand first in line for reimbursement of debts. While PFGBest was primarily focused on clearing futures and forex, they, like MFGlobal, have a smaller securities arm. Oh, and guess what? Some of the funds for the firm were being held at JPMorgan here, too. We have no idea whether tomorrow will bring news of receivership or bankruptcy, JPMorgan liens or otherwise, but should the case be bankruptcy, our concern is that the industry’s failure to act in this area of regulation could end up burning investors once more.

New Concerns

Unfortunately, it’s not just a matter of the same problem popping up again. Putting aside personal involvement, the aspect of this situation that is so desperately disconcerting relates to the regulators. The PFGBest case highlights additional problems in the regulation of the futures industry- particularly relating to the competency of the CFTC and NFA.

We now know that there were false statements made all the way back in 2010. We know that the NFA is the self-regulatory agency charged with overseeing PFGBest. Think it through:

Regulators conducted spot checks on all FCMs following the MF Global bankruptcy. No action was taken against PFG at the time.
Regulators have been in the process of conducting a regular audit of PFG for the past several months- an audit which takes place on an annual basis. In our experience, both with Attain and other firms, this includes direct contact with the banks holding firm and customer money to confirm the numbers provided by the firm being audited. In fact, the NFA just switched to a 3^rd party firm to conduct these confirmations, aptly named confirmation.com. Below is an example of just such a digital confirmation request generated by this confirmation software.

Sample Confirmation Authorization Request from NFA

FCMs are required to provide daily and monthly segregation reports. These only require confirmation of the accuracy by the individuals submitting the report, but the NFA still failed to even due a minimum in vetting of these reports.
According to the NFA, “A Form 1-FR for the FCM’s or IB’s fiscal year-end must be certified by an independent public accountant.” Who was the auditor who confirmed the balance of money at U.S. Bank? And did the NFA properly analyze the audit?

The failure of the NFA to catch this apparent fraud is a travesty, at best. As members of the NFA, it is our dues that pay for the “regulation” provided by the NFA. Excuse us, but can we have our money back?

Outside of our frustration as members, it has become abundantly clear that our regulators are asleep at the wheel. The NFA answers to the CFTC, and the CFTC is to answer to Congress. Yet, the CFTC clearly failed to monitor NFA responses to the MF Global crisis, and we saw in the MFGlobal Congressional proceedings that our elected officials are more interested in political grandstanding than thorough investigation and effective questioning. Perhaps more importantly, they have little to no understanding of the way the markets they regulate over oversee operate.

So, what, exactly do we want to see happen in the coming days and weeks to address this egregious failing?

Timely liquidation of all PFG related assets to satisfy the shortfall of client funds.
If there is still a shortfall – the CME and other major players in the industry stepping up to make customers whole (yes, it sets a precedent, but you will earn it back 10 fold in karma and respect)
A full investigation of PGFBest by the Attorney General, along with prosecution to the fullest extent that the law allows for any crimes committed, either by auditors, the firm or individuals within.
A full investigation into the practices and behavior of the NFA, and, should the findings support it, prosecution of the NFA for losses incurred due to their failings.
Congressional hearings on the failings of the NFA and CFTC in this instance without the soft balling seen in Dimon’s questioning.
The commission of a report by the Government Accountability Office into the practices of futures SROs, the CFTC, and Congress in terms of efficacy and consistency.

While the solutions we discuss may seem, at times, lofty, they could not be more necessary. This isn’t just about a couple hundred million in client funds. This is about the existence of an entire global marketplace.

Talking Consequences

You hear of banks being too big to fail, but this is a totally different level of significance. This is an industry that is tooimportant to fail. The recency of the MFGlobal scandal, coupled with this new crisis at PFGBest, has decimated confidence in the futures industry. Take one glance at the Twitter feed for PFGBest right now, and you’ll find a litany of comments regarding the “death” of the futures industry. If people cannot trust their FCMs to safeguard their funds, they will pull the money out of the markets. What happens when futures markets become shells of themselves?

John Highland, CIO of United States Commodity funds, explained in a post we put out on oil speculation several months ago, “We go back to the 1970′s where OPEC posts the price of oil. You don’t like it? Tough. Maybe we go to a market like Iron Ore, where six private companies hold shadowy negotiations to set the price in an opaque manner. The third choice is that you have more participants involved, but because of the inability for players to hedge their positions, you’d be far more susceptible to higher price volatility, and, on average, higher prices.”

“No one will finance an oil company at the current rates in this scenario, but if we assume that they would, all the sudden, you can no longer [transparently evaluate the prices as collateral], so you either charge them more, which leads to higher prices [transferred to the consumer], or you loan them less, which will lead to less capacity coming on stream.”

So either we go to a dictated price, a shadowy oligarchy determined price, or a small market that’s rolling dice and exposed to maximum risk, all of which lend themselves to higher price volatility. Oh, and financing complications result in higher commodity prices across the board.

Think this is all just hot air? IHS released a report which detailed the impact of trading limitations- not the decimation of futures markets, but trading limits- in the energy sector. Their take? Severe limits alone would have such an impact on liquidity, price volatility and transparency that we’d be staring down massive costs to our economy.

Source: IHS

Again, this was just derived off of limits being put in place. Imagine the consequences we would face should our futures markets fall into a state of utter dysfunction.

Final Word

Let us make this clear- we are positively irate. We feel we have been betrayed by our business associates, regulators and government. We know the best course of action is to be level headed and deal with the facts as they come in, but the Chicago in us isn’t about to take this laying down. We have offered our resources to the CCC, and will do all we can to do right by our customers. You can follow along on our blog and on Twitter for ongoing coverage. We’re not anticipating a lot of sleep in the coming weeks.

This isn’t just about our business- it’s about clients, and their hard earned money. It’s about their lives’ savings and the futures they’ve been building. If this sounds personal, it’s because it is. Our clients are our family. And we’re not giving up without a fight. That’s a promise.

and.....

http://www.zerohedge.com/news/pfgs-chairman-was-forging-bank-documents-years-even-cftc-gave-all-clear

PFG's Chairman Was Forging Bank Documents For Years Even As The CFTC Gave An "All Clear"

Submitted by Tyler Durden on 07/10/2012 17:55 -0400

Bernard Madoff

Capital Markets

Commodity Futures Trading Commission

fixed

MF Global

Post Office

Reuters

If there is an event that should cost Gary Gensler his job as head regulator at the CFTC, it is this. According to a just released Reuters report, the head of MFG(lobal) part 2, PFG, whose story we broke yesterday, Russell Wasendorf Sr."intercepted and forged bank documents for more than two years to cover up hundreds of millions of dollars in missing money, a person close to the situation." Once Wasendorf realized he was caught, and knew the implications of his actions would be exposed for the whole world to see, he tried to commit suicide, and failed. "Wasendorf, 64, is reported to be in a coma after a suicide attempt Monday morning, according to a complaint filed by the Commodity Futures Trading Commission on Tuesday that accuses Wasendorf and Peregrine of fraud." And while crime happens all the time, what is truly stunning is that as we reported previously, the CFTC gave the firm a clean bill of health in its January inspection of Peregrine Financial Group.That's 6 months ago. The CFTC, as a reminder, was it regulator. The entity whose sole charge is to make sure that firms at least have real, not rehypothecated, cash in their segregated client bank accounts. PFG never did for the past two years. And somehow the CFTC missed this. MF Global was a warning shot, and the CFTC missed it entirely. And not only that but 2 months later ir pronounced PFG clean. For this Gensler has to be fired immediately, and with prejudice.

More from Reuters:

The source offered new details on how Wasendorf allegedly carried out the deceit, which involved the forging of confidential documents that the NFA uses to verify a broker's cash balance with its depository institution.

Wasendorf intercepted these documents after they were mailed by the NFA, the broker's first-line regulator, to U.S. Bank, where PFGBest had said it had well over $200 million on deposit, the person said. The NFA has said the account actually held just $5 million this week.

Wasendorf had set up a post office box in Cedar Falls, Iowa, according to a second person involved in the matter. It was to that post office box that NFA sent the documents, which were addressed to the bank.

The post office box was neither in Wasendorf's name nor registered to the bank, the second person said.

Wasendorf then forged signatures and fabricated bank balances on the documents and simply mailed them back to the Chicago-based NFA, the person said.

Calls to spokespeople for PFGBest and NFA were not returned. A woman who answered the phone at the home of Wasendorf declined to comment.

If anyone deserves some credit here, it is the NFA:

The scheme apparently began to unravel after the NFA began to press Wasendorf, who was an early advocate of electronic trading, to allow the regulator to confirm balances electronically and directly with the bank, rather than in a hard copy via mail, the person said.

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, the person said. PFGBest's total segregated funds requirement was around $400 million, meaning more than half is missing.

Finally the spin: PFG is not MFG, it is Madoff.

While news that a second broker in less than a year appears to have misappropriated customer funds drew immediate comparisons to the MF Global failure in October, the source said the prolonged nature of the apparent deceit drew a more fitting parallel to the Ponzi scheme run by Bernard Madoff, though the size of the funds missing from PFGBest is tiny by comparison.

Well thank god for that: the farmers whose money is now forever gone can sleep much better knowing their cash was not Corzined, it was merely Made-off.

Of course, the real problem is that since there was only $5 million in the "client fund", there never likely was more than $5 million in real cash terms to begin with.

And this is what the CFTC signed off on.

Cur Congressional banana hearings, witch trials, and more fingerpointing which will result in more of the same: a former Goldmanite in charge of the CFTC, and virtually no hope that anything in these broken capital markets will ever be fixed until the big reset finally sweeps all this toxic garbage away.

and.......

First MFG(lobal), Now PFG: Who Is Next?

Submitted by Tyler Durden on 07/10/2012 09:32 -0400

Capital Markets

Commodity Futures Trading Commission

ratings

It seems the murky world of segregated accounts and FCMs is coming under the right amount of scrutiny once again. Atlas Ratings - who provide detailed ratings analysis on the entire spectrum of FCMs - had identified PFG Best in the bottom 5% of all FCMs (but with 4 other firms ranking lower on their proprietary rating scale - see below). As they note, almost across the board, PFG Best lagged dramatically in most categories. The only category where they did not have low marks was in regard to exchange penalties. The commodity exchanges had not penalized PFG very often for their clearing procedures or floor record-keeping, that much was done adequately within the company. Everything else we monitor showed weakness within the company:

Their net capital ratio and the trend of that ratio was extremely weak.
Their business is not diversified, they rely on minimal interest revenue, commissions and any proprietary trading.
Customer assets growth has been weak, healthy companies attract and retain new accounts.
PFG Best has had many CFTC & NFA penalties, these are major red flags. They failed to ID a massive ponzi scheme.

The big question - obviously - is who is next? The following table provides some clear indications of where the stress may just explode next.

It would seem account holders at Pioneer Futures, Rosenthal Collins Group, Crossland, Forex Capital Markets, and Velocity Futures should be checking in on those funds?

and....

http://dealbook.nytimes.com/2012/07/09/after-mf-global-another-brokerage-collapses-with-200-million-missing/

( Amazing , after being victimized by MF Global , James Koutoulas gets burned by PFG Best also ! )

After MF Global, Another Brokerage Collapses With $200 Million Missing

BY AZAM AHMED

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After the failure of the futures brokerage MF Global left

customers missing more than $1 billion, regulators

promised to tighten rules, enhance oversight and crack

down on wayward firms.

But months later, regulators are scrambling to deal with

the collapse of another brokerage.

After discovering accounting irregularities, regulators on Monday essentially shut down

PFGBest, a well-known player in the small world of futures trading.

Now, banks accounts with customer funds appear to be short more than $200 million,

regulators said. Monday morning, according to a statement to clients, the brokerage’s

chairman and chief executive, Russell R. Wasendorf Sr., attempted to commit suicide.

While regulators are still trying to piece together what happened, the National Futures

Association said the bank statements from U.S. Bank and Trust, where the money was held,

may have been fabricated. The discrepancies date back a couple of years. In February 2010,

an account that purported to have some $218 million, in reality contained just $10 million.

The loss of customer capital — just months after the bankruptcy of MF Global — could have

major implications for regulators. Authorities recently conducted reviews of brokerage

firms in the wake of the MF Global scandal, and found nothing alarming.

“How on earth can a regulated entity can just make up the bank statements for three years?

” asked James Koutoulas, the head of the Commodities Customer Coalition, a group of

customers still fighting for the return of their missing money following the collapse of MF

Global. “I don’t even know what to say – I’m so shocked that you can forge bank statement

for years, and the regulator wouldn’t just check the account balance at the bank directly.”

The NFA did not immediately respond to requests for comment.

Mr. Koutoulas, a hedge fund manager, said his firm held less than $3 million with PFGBest.

Regulators said Monday that no one would be allowed to withdraw their money from the

firm for the time being.

“How do you trust the financial industry,” asked a bewildered Mr. Koutoulas.

The specifics of the firm’s downfall remain hazy. Regulators said that on June 29 the

brokerage indicated that it had about $400 million in customer money. Of that, about $225

million was located at U.S. Bank.

On Monday, the NFA received information that Mr. Wasendorf “may have falsified bank

records.” The regulator called U.S. Bank and discovered the firm only had about $5 million

on deposit.

In the futures industry, customer money is not insured, meaning that if the cash is not

recovered clients will have little recourse. Regulators have proposed a number of fixes,

including setting up an insurance fund to guarantee the money.

“We continue to witness circumstances which make a futures insurance fund a needed

option,” said Bart Chilton, a commissioner at the Commodity Futures Trading Commission.

“Such a fund is critically important. Futures customers should be protected like banking

and security customers are protected.”

PFGBest is one of a handful of futures firms, which essentially line up buyers and sellers of

futures contracts for commodities. The firm was wholly-owned by Mr. Wassendorf. While

not the size of MF Global, which held more than $5 billion in customer cash before its

collapse, PFGBest was a major player in the tight-knit world of Chicago brokers.

But the industry has been under fire in recent years. Commissions have flattened, as new

entrants and online trading takes a bite out of business. Even the interest typically earned

for simply holding customer money has been close to zero, amid the low-rate environment

in the United States.

It was that weak business outlook that prompted the head of MF Global to pursue risky

strategies, in an effort to bolster profit and fund the company’s transformation into an

investment bank. But the bets that Jon S. Corzine made were too risky, the market lost

confidence and the firm went under. As it collapsed, the firm misused customer money in

an effort to stay afloat, leaving farmers, traders and others missing more than $1 billion.

On Monday, Mr. Wasendorf, the head of PFGBest, was discovered in his car outside of his

company’s Iowa headquarters, according to local press reports. He was flown to University of Iowa Hospitals and Clinics in critical condition

In addition to his financial firm, Mr. Wasendorf founded several publications during his

career, including SFO – Stocks, Futures and Options, the Official Advocate for Personal

Investors, according to a biography on the firm’s website. He also serves on the FCM

Advisory Committee of the National Futures Association.

PFGBest has previously faced scrutiny. In February of this year, PFGBest was fined

$700,000 for failing to detect a Ponzi scheme perpetrated by a Minnesota man who used

the firm as a broker.

http://www.zerohedge.com/news/pfgbest-now-mf-global-part-2-220-million-segregated-client-money-has-just-vaporized

UPDATE 2: Have no fear though since as recently as January 2012, the CFTC did not find any "material breaches of customer funds protection requirements" at FCMs (firms like PFGBest)

UPDATE 1: Account-holders may not be so surprised to find who is the custodian for the PFGBest FX accounts: none other than huge MFGlobal fans, JPMorgan!

http://www.zerohedge.com/news/pfgbest-now-mf-global-part-2-220-million-segregated-client-money-has-just-vaporized

PFGBest Is Now MF Global Part 2 As $220 Million In Segregated Client Money Has Just Vaporized

Submitted by Tyler Durden on 07/09/2012 19:17 -0400

Commodity Futures Trading Commission

fixed

MF Global

None

Remember when the entire segregated account fiasco was supposedly fixed in the aftermath of the November 2011 MF Global bankruptcy, and where regulators: the CFTC, the SEC, the CME, and anyone you asked, swore up and down this would never happen again? Turns out that 7 months later, the spirit of MFGlobal has struck again and it is called PFGBest, whose store we broke three hours ago. From the just filed affidavit by Lauren Brinati who is working with the National Futures Association, which in turn has just filed notice prohibiting PFGBest from operating futher, and freezing all of its accounts:

On or about June 29, 2012 PFG reported to NFA that it had approximately $400 million in segregated funds, of which more than $225 million were purportedly on deposit at U.S. Bank
On or about July 9, 2012, NFA received information indicating that PFG's Chairman may have falsified bank records
On July 9, 2012, NFA made inquiry with US Bank and learned thatrather than the $225 million that PFG had reported as being on deposit at US Bank just days earlier, PFG had only approximately $5 million on deposit at U.S. Bank.

Translation: another $220 million segregated account pillage has just taken place, in the vein of none other than Jon Corzine and MF Global.

The money has now officially vaporized.

And it is truly wonderful of the NFA to finally get involved, after PFG's clients have lost about 98% of their cash held with the firm.

In other potential news, a rather prominent New York bank, recently closely associated with marine wildlife, may have just cut its Q2 losses by up to $220 million.

http://www.zerohedge.com/news/futures-brokerage-pfg-best-freezes-accounts-following-discovery-accounting-irregularity

Futures Brokerage PFG Best Freezes Accounts Following Discovery Of Accounting Irregularity

Submitted by Tyler Durden on 07/09/2012 16:53 -0400

Capital Markets

FINRA

Henry Paulson

MF Global

Precious Metals

Real estate

Reuters

Romania

Trading Strategies

Update 3: Russ Wasendorf Sr., the founder and CEO of PFGBest, reportedly attempted to commit suicide this morning outside the corporate headquarters in rural Cedar Falls, company officials confirmed Monday afternoon.

Update 2: PFGBest had $400MM in customer segregated funds at the end of April. Is JPMorgan about to "discover" another $400 million in Q2 "profits"?

Update: PFGBest Plans 'Several Hundred' Layoffs, Spokeswoman Tells Dow Jones - Dow Jones. Sounds like a good idea in the facec of liquidation

Just out from futures broker PFG Best to clients, where the owner's suicide attempt apparently has led to a whole new MF Global spin off.

Monday, July 9, 2012

Due to a recent emergency involving Russell R. Wasendorf, Sr., a suicide attempt, some accounting irregularities are being investigated regarding company accounts. PFGBEST is wholly owned by Mr. Wasendorf. Therefore, the NFA and other officials have put all funds on hold, and PFGBEST is in liquidation-only status with our clearing FCM. What this means is no customers are able to trade except to liquidate positions. Until further notice, PFGBEST is not authorized to release any funds. We will update you as any new procedures are stipulated and with any further information as it becomes available.

... And just as the public trust was storming back into the capital markets.

From Reuters:

Small U.S. futures brokerage PFGBest told customers on Monday that its funds had been put "on hold" as it investigates accounting irregularities following an apparent suicide attempt by the firm's owner.

The Cedar Falls, Iowa-based broker, which had about $400 million in customer segregated funds at the end of April, said it was in "liquidation-only" status with its futures commission merchant (FCM), meaning that "no customers are able to trade except to liquidate accounts," according to the notice.

It said the National Futures Association (NFA) and other officials had put all its funds on hold.

PFGBest officials were not immediately available to comment. One PFGBest broker verified the letter. A second source familiar with the company said owner Russell R. Wasendorf, Sr., had attempted to commit suicide at the firm's Iowa compound.

From WCF Courier:

Prominent Cedar Falls businessman hospitalized after suicide attempt

Russ Wasendorf Sr., the founder and CEO of PFGBest, reportedly attempted to commit suicide this morning outside the corporate headquarters in rural Cedar Falls, company officials confirmed Monday afternoon.

Wasendorf was taken to Sartori Memorial Hospital this morning, then later was airlifted to University of Iowa Hospitals and Clinics, where he was in critical condition.

Emergency crews were called to the headquarters shortly after 8 a.m. after employees found a man in a car near the headquarters building, located near the Beaver Hills Country Club.

The National Futures Association, the self-regulating organization of the United States futures industry, has placed PFGBest on a “liquidation only” status due to Wasendorf’s condition. The company is wholly owned by Wasendorf.

The company stated that all funds have been put on hold, meaning customers will only be able to sell off their interests, until future notice.

According to company officials, accounting irregularities are being investigated.

Wasendorf, the founder of PFGBest, an international brokerage firm, moved the corporate offices of the company from Chicago to rural Cedar Falls in 2009. He had started the company in Chicago in 1990.

Wasendorf is a Cedar Falls native who started his business in his hometown.

Meet Russell R. Wasendorf, Sr.

PFGBEST's Leadership

Russell R. Wasendorf, Sr.
Chairman and Chief Executive Officer of PFGBEST

PFGBEST, the brand that evolved from Peregrine Financial Group, Inc., was incorporated in 1990 and has grown to become one of the largest U.S. non-clearing futures brokerage firms.

PFGBEST has a presence in the world’s major financial centers, plus a network of more than 700 branches, introducing brokers, foreign introducing brokers and Commodity Trading Advisors (CTAs) serving customers in 80 countries. The company is an industry leader in technology innovations to benefit online traders and investors. It has multiple proprietary online trading platforms that have been spun off of the original BESTDirect Online Trading system, which was one of the very first to deliver customer orders directly into the Globex trading engine of the Chicago Mercantile Exchange, in 1998.

Throughout the 1980s, and 1990s, Russell R. Wasendorf, Sr. invested in technological capabilities to create the BESTDirect Online Trading platform, well before other brokerage firms were engaged in this science.

Today, the BESTDirect Online Trading platform continues to be known for its efficiency and reliability, making futures and forex markets more transparent and more easily accessible for all participants. PFGBEST has grown to be a liquidity provider that is completely unbiased and diversified to accommodate trading strategies across a variety of asset classes, including futures, forex, options, securities and precious metals.

PFGBEST has a leading position in online futures, forex and options; retail brokerage; forex services for individual and institutional clients; managed accounts; demand-inspired new technologies and investor education.

Russell also founded SFO – Stocks, Futures and Options, the Official Advocate for Personal Investors – in 2001. The magazine became one of the most widely-distributed monthly publication specializing in these investments, and today it is completely digital.

He is a noted writer and educator, having written or co-written six books about futures and trading. These include:Commodity Trading: The Essential Primer; All About Futures From The Inside Out; All About Commodities From The Inside Out; All About Options From The Inside Out; All About Managed Futures From The Inside Out; and The Complete Guide To Single Stock Futures.

In 2007, Russell founded W&A Publishing, a firm that has brought numerous authors to market and developed a reputation as “the trader’s tutor”. In 2009, he purchased the assets of another well-regarded investment publisher, Trader’s Press, and moved the business to Cedar Falls, Iowa. The two were merged under the Wasendorf & Associates, Inc. brand in 2010.

Russell is widely recognized as an expert and industry voice in many venues, advocating on behalf of efficiencies for individual investors. He serves on the FCM Advisory Committee of the National Futures Association (NFA).

He is one of the original partners in a real estate development company, Avrig 35, headquartered in Bucharest, Romania. Avrig 35 has built some of the most significant commercial buildings in East Europe during the past decade.

He sits on the Board of the Peregrine Fund along with notables including Patricia Disney, Julie Wrigley, Lee Bass, Henry Paulson, Jr. and Paxton Offield. The Peregrine Fund is a non-political, science-based organization in Boise, Idaho, which works worldwide to conserve wild populations of birds of prey. He also sits on the President Committee of both the University of Iowa and the University of Northern Iowa.

Russell began his career as director of public affairs for the American Soybean Association and is a photographer and cinematographer. After that, he worked with Commodities Magazine from 1976 to 1980 and was Director of the Commodities Educational Institute, an affiliated entity. In 1980, he started Wasendorf & Associates, and he founded the Center for Futures Education. Wasendorf & Associates created an Introducing Brokerage arm – Wasendorf & Son Company – in 1986. Peregrine Financial Group, Inc. was born in 1990 to better serve trading customers.

Russell’s philanthropic endeavors are channeled through Peregrine Charities, a private family foundation that he founded in 2004, with a charitable focus on research and cures for rare childhood diseases and help for the families facing these illnesses.

He received two honors in 2010: the Patriotic Employer Award, for support of the U.S. National Guard and Reserve and employees who are serving or have served in the military; and, the Treating Capital Award from the Cedar Valley Alliance and the Cedar Falls Chamber of commerce for providing regional opportunities in technology employment and commitment to green practices and sustainability efforts.

* * *

And while Senior obviously had some problems, as confirmed by his Finra record, his son appears to have had some close encounters with the regulators as well.

Catharsis Ours

Monday, July 9, 2012