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Embezzlement Brings Down Peregrine Financial Group « Back
Selina Harrison, November 2012
 
Russell Wasendorf Sr., the former chief executive of Peregrine Financial Group (PFGBest), pleaded guilty in September to embezzling more than $200m from customers of his futures brokerage, making false statements to regulatory agencies to cover his tracks, and mail fraud. Not only has his image been transformed from that of a highly-regarded businessman to one of Iowa’s most notorious corporate criminals, following an unsuccessful suicide attempt in July, Mr Wasendorf Sr. is now facing up to 50 years in prison.

Mr Wasendorf Sr. founded PFGBest, which brokered trades in US commodity and foreign exchange futures and options. Once regarded as a noble figure who supported a range of institutions from health care to universities, he started trading commodities from his home in Cedar Falls during the early 1970s. In 1990 he launched Peregrine Financial Group, which would later become PFGBest, and grew significantly over subsequent years, opening offices in Canada and Shanghai, and buying smaller rival Alaron in 2009.

On 9 July this year, it emerged that more than $200m was missing from clients’ accounts when Mr Wasendorf Sr. was found in his car near the company’s Iowa headquarters, with a suicide note beside him alluding to financial troubles with the company. The apparent suicide attempt came hours before the National Futures Association (NFA), an industry group that also plays a regulatory role, said it had issued an emergency order to, in effect, freeze PFGBest’s operations after finding that a US bank account the broker said contained $225m in customer funds actually held only $5m. “It appears that PFG does not have sufficient assets to meet its obligations to its customers,” the NFA said.

PFGBest told customers their funds had been frozen by the NFA and clients would be allowed to close open trading positions, but would not be able to withdraw funds or make new trades until further notice. Just shy of a year after the collapse of MF Global, the news stoked renewed anxiety over the stability of the brokerage industry, although PFGBest is much smaller than MF Global, which lost $1.6bn of customer funds.

Following spot checks after the MF Global bankruptcy, in January the Commodity Futures Trading Commission (CFTC) gave a clean bill of health to dozens of brokers. However, in a complaint against its founder and chairman Mr Wasendorf Sr., the CFTC alleged that PFG, the regulated unit of the brokerage PFGBest, and its owner had defrauded customers and lied to regulators in order to hide the shortfall. “The whereabouts of the funds is currently unknown,” the CFTC said in the complaint and asked an Illinois judge to issue a restraining order against both Mr Wasendorf Sr. and the firm, and to appoint a temporary receiver for their property.

The Omaha, Nebraska office of the Federal Bureau of Investigation (FBI) had also begun to investigate the case, but the CFTC already had its suspicions about how the fraud was played out and pushed on with criminal proceedings which alleged that from 2010 through July of 2012, Mr Wasendorf Sr. made false statements to the CFTC regarding the value of customer funds. Mr Wasendorf Sr. later confirmed the fraud himself, revealing it had begun “nearly twenty years ago”.

He said that when auditors began contacting banks directly to verify brokers’ balances, he opened a post office box in the name of Firstar Bank – later US Bank – and intercepted the confidential forms. Mr Wasendorf Sr. forged signatures and fabricated bank balances on the documents and simply mailed them back to the NFA. The scheme apparently began to unravel when the NFA shifted to electronic confirmations which demanded its auditors be allowed an electronic, direct look at his bank accounts. When Mr Wasendorf Sr. appeared reluctant to conform to the new way of confirming the balance, the regulator became suspicious and, after signing authorisation to the switchover and aware his deceit would quickly be uncovered by regulators, Mr Wasendorf Sr. tried to take his life.

On 13 July, FBI agents arrested Mr Wasendorf Sr., and following his discharge from hospital he stood before Magistrate Judge Jon Stuart Scoles in a Cedar Rapids courtroom and handed over a note which explained and admitted his deceit. In the signed statement, left along with a suicide note and released as part of the criminal complaint, Mr Wasendorf Sr. said “I was forced into a difficult decision: should I go out of business or cheat?” he wrote. “I guess my ego was too big to admit failure. So I cheated,” the note said. He was taken to Linn County Jail to await trial, and told he faced decades in prison.

Meanwhile, on 10 July PFG filed to liquidate under Chapter 7 of the US bankruptcy code. A court filing showed that PFG had between $500m and $1bn of assets, between $100m and $500m of liabilities, and between 10,000 and 25,000 creditors. On 13 July, the firm was given two months to wind down its operations and was allowed to retain 56 employees to aid the process. Bankruptcy Trustee Ira Bodenstein said in the filing, he “believes that the continued operation of the debtor’s business is both necessary to maintain the value of the assets and to allow him to maximize the recovery from the liquidation”.

Three days later, Mr Wasendorf Sr. said that he had spent most of the money on shoring up his firm’s capital, funding a new headquarters in Iowa and paying fines and fees. However, in court Michael Eidelman, the receiver for Mr Wasendorf Sr. in the bankruptcy of PFGBest, said he was moving to secure personal assets, including a $100,000 personal wine collection, a jet valued between $7m and $10m and a condominium near downtown Chicago, valued at about $1m.

Around this time Mr Bodenstein – reluctant to release any money before knowing the correct figure so creditors received their fair share – hired a team of forensic accountants from PricewaterhouseCoopers to ascertain how much money remains at the failed futures brokerage and in customers’ accounts, a first step before any money can be released.
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