Note: This story now incorporate the official complaint information from the Commodity Futures Trading Commission. And we've added information regarding a Canadian subsidiary
The market is skittish about any whiff of scandal when it comes to brokerage firms and clearing operations. The MF Global debacle late in 2011 has become a hallmark of regulatory failure, but there are now signs this week that the regulators have more work to do.
In a new development, the Commodity Futures Trading Commission filed a formal complaint on Tuesday alleging fraud, misappropriation of customer funds, violation of customer fund segregation laws and making false statements.
FINANCIAL WORRY: Peregrine Financial Group and Peregrine Asset Management are under enforcement action by National Futures Association.In the announcement, CFTC says it filed the complaint with the U.S. District Court for the Northern District of Illinois against PFG and its owner Russell Wasendorf Sr. The complaint alleges that PFG and Wasendorf committed fraud by misappropriating customer funds, violated customer fund segregation laws and made false statements in financial statements filed with the Commission.
The Commission action alleges that from at least Feb. 2010 through the present, "PFG and Wasendorf failed to maintain adequate customer funds in segregated accounts as required by Commodity Exchange Act and CFTC regulations." The complaint also alleges that defendants made false statements in filings required by the Commission regarding funds held in segregation or customers trading on U.S. exchanges.
CFTC is seeing a restraining order to freeze assets, appoint a receiver and preserve records. And the litigation seeks "restitution, disgorgement, and civil monetary penalties among other appropriate relief."
Late Monday, the National Futures Association put Peregrine Financial Group and Peregrine Asset Management under emergency enforcement action. NFA has taken what it calls Member Responsibility Action to protect customers because PFG has "failed to demonstrate that it meets capital requirements and segregated funds requirements," according to a statement from the organization.
The statement says that PFG and PAM are "prohibited from soliciting or accepting any additional customer accounts or customer funds, except as margin for existing positions. Additionally, PFG and PAM are prohibited from accepting or placing trades for any customer accounts except for the liquidation of existing customer positions and are prohibited from distributing, disbursing or transferring any funds, including to existing customers, without the prior approval of NFA."
This liquidation and lockdown move is causing a stir in the trade as brokers can't get to their funds. And it raises new questions about the integrity of segregated funds.
The NFA's MRA says that "on or about July 9" NFA received information indicating that PFA's chairman may have falsified bank records."
The responsibility action notes that an inquiry by NFA to U.S. Bank, which is the purported deposit holder for PFG segregated funds, the association found that PFG only had about $5 million on deposit. However, PFG had reported it had $225 million on deposit in the bank. In addition, NFA learned that "in contrast to purported bank confirmations submitted to NFA that sought to confirm U.S. Bank account balances as of Feb. 2010 and March 2011, that reported balances of approximately $207 million and $218 million, respectively, PFG's actual balances at U.S. Bank at those times was less than $10 million for each one of these months."
The association says PFG has been unable to demonstrated it has sufficient capital to meet its minimum adjusted net capital requirement or segregated funds to meet its obligations to customers.
Chairman attempts suicide
The same day that NFA issued the 'liquidation only' order, CEO Russ Wasendorf Sr., was hospitalized after reportedly attempting to take his own life, according to a report in the Waterloo Courier.
Wasendorf, 64, is founder of the company, which moved its headquarters to Cedar Falls, Iowa, in 2009. The company was founded in 1990. The paper reports that Wasendorf is now at University of Iowa Hospitals and Clinics in critical condition after the suicide attempt.
Website check enlightening
Farm Futures made a quick check of the PFGBest website run by Peregrine Financial Group and found it interesting that there's no indication the organization is under any enforcement action. In fact, it was possible to open a new account with the group.
There are no notices on the site or any indication that there is a problem, or suspicion that the firm is in any trouble.
The missing $220 million, or more, found by NFA in its investigation of the PFG and PAM records raises the same problems, though on a smaller scale, that MF Global created. This also raises further questions about regulators, their actions and the safety of customer accounts.
Farmers and traders who rely on clearing firms to keep money segregated have one more example that these firms may not have a firm grip on the issue. There are a lot of allegations to sort out by NFA, the Commodity Futures Trading Commission and even CME Group regarding protection of segregated funds.
Canada group not affected
The Peregrine Financial Group Canada Inc., is a wholly owned subsidiary of PFG, but it issued a statement Tuesday noting that the Canadian group is not subject to or affected by the NFA regulatory actions. In its statement PFGC says that "it appears that all client monies and assets are accounted for at the Canaidan subsidiary."
The Canadian regulatory agency - the Investment Industry Regulatory Organization of Canada - has approved transfer of client futures accounts in bulk to another IIROC-regulated firm - RJ O'Brien & Associates Canada, Inc. Before the transfer is complete, which may take a few days, clients can liquidate their contract positions directly with PFGC.
More information will be made available as this story unfolds.