FBI Investigates Peregrine Financial

July 10, 2012 at 16:09

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The Federal Bureau of Investigation confirmed it was involved in investigating the circumstances surrounding a $200m shortfall in customer accounts discovered at a Chicago-based futures broker.

The probe into Peregrine Financial Group was prompted by an apparent suicide attempt by company founder and chairman, Russell Wasendorf Sr.

“We can confirm that we are involved, but we cannot comment because it is an ongoing investigation,” a spokeswoman for the FBI division in Omaha, Nebraska, said.

The regulator, the National Futures Association, said it had learnt on Monday of the shortfalls in 2010 and 2011, and ordered Peregrine to stop doing further business.

The development comes only nine months after MF Global, a much larger futures broker, left behind a $1.6bn hole in customer funds as it slid into bankruptcy. The NFA, a self-regulatory body, said had “reason to believe that PFG does not have sufficient assets to meet its obligations to its customers”.

Peregrine reported holding $400m on behalf of customers in late June, but on Monday an NFA inquiry revealed only a fraction of that amount was deposited at the broker’s bank.

The futures association also said it “received information indicating that PFG’s Chairman may have falsified bank records”. Mr Wasendorf is one of the best-known figures in the Chicago futures broking community.

Patricia Campbell, PFG spokeswoman, confirmed to the Financial Times that the company had sent an email to customers on Monday saying that “accounting irregularities” were being investigated by the NFA. She said the association had intervened after Mr Wasendorf had left a suicide note “saying he had done something wrong”.

Local media reported he had attempted suicide on Monday morning outside PFG offices in rural Iowa, where Mr Wasendorf had moved company headquarters from Chicago in 2009. The Commodity Futures Trading Commission, the government regulator for the US futures market, has opened an investigation into the case, a person familiar with the matter said.

A “spot check” performed on US futures brokers’ customer accounts in the wake of the MF Global failure found all, including PFG, were in compliance, CFTC said in January.

The Chicago-based NFA had responsibility for auditing the broker’s accounts. The association said that PFG last month reported that it had $400m in segregated funds, of which more than $225m were deposited at US Bank, a bank based in Minnesota.

After contacting US Bank on Monday, the NFA found that PFG had only $5m on deposit there, NFA said. Further, NFA found that two balances of $207m and $218m reported by PFG for February 2010 and March 2011 respectively at US Bank were false. PFG only had less than $10m for each of those months, the NFA said.

PFG is an active trader on behalf of customers in financial and commodity futures on the Chicago Board of Trade and Chicago Mercantile Exchange, both operated by CME Group. It is also active in forex markets.

In February, a court-appointed receiver sued the broker over losses customers suffered in a $190m Ponzi scheme operated by Trevor Cook of Minnesota. PFG “permitted Cook to open, maintain, and manage [accounts] in the face of overwhelming red flags of fraud or insolvency”, the complaint said.

The $48m Mr Cook transferred to PFG “represented a very significant portion of PFG’s overall business”, the complaint said. The emergency action against PFG is likely to reignite calls for the establishment of a form of insurance to guard against customer fund losses.

Bart Chilton, a CFTC commissioner, told the FT: “We continue to witness circumstances which make a futures insurance fund a needed option. Such a fund is critically important. Futures customers should be protected like banking and security customers are protected.”

The NFA’s discovery of shortfalls dating back more than two years may also add to scrutiny of futures market regulation. “How does this go on year after year and you don’t find out?” said one longtime lawyer for the futures industry. “The regulators need to be held responsible.”