"PFGBEST is not only customer-centric, but compliance-focused. We consider it a privilege to conduct business with you and to be an advocate for you."
So read the November 2011 letter from PFGBest President and Chief Operating Officer Russ Wasendorf, Jr. to the futures broker's customers. The Iowa-based trading house was looking to assuage its clientele in the wake of MF Global's (OTC: MFGLQ) epic failure.
"It is our policy," the letter continued, "to keep extra funds on deposit in our customer segregation accounts to protect you."
A day later, the company followed up with a press release touting its attempts to help unfreeze MF Global customer assets so that they could be transferred to PFGBest. "We are concerned about the sanctity of the marketplace," quipped Rebecca Wing, the company's General Counsel.
Fast forward eight months and PFGBest parent, Peregrine Financial, is kaput. It's done for. The company is being liquidated, and more than $200 million of customer money is missing. In the U.S. Commodity Futures Trading Commission's case against the company, it alleged that the funds shortfall may have been ongoing for more than two years. According to a confession from founder Russ Wasendorf, Sr., he's actually been stealing money from the company for decades.
Just like MF Global, right?
Peregrine is a futures broker; so was MF Global. When MF Global imploded, it was revealed that customer money was missing. Ditto for Peregrine. There are even large financial institutions tangled up in both cases: JPMorgan Chase
While those details may seem to make the two cases look very similar -- albeit with Peregrine as a much smaller iteration -- what's coming to light at Peregrine makes it look like a much different beast than MF Global.
The final chapter of the MF Global case is still far from being hammered out, despite the months of work and the millions of dollars spent on lawyers and investigators. But, at this point, the story looks a lot like one of hubris cum panic. That is, CEO Jon Corzine put the company on a massive, risky bet that went against him and, when the walls started to cave, somebody made a last-ditch effort to save the sinking ship by dipping into customer funds.
Perhaps it'll turn out that company executives did something blatantly illegal under the pressure of imminent company collapse. Or maybe it'll be much more anticlimactic and we'll find that it was just a case of very poor internal controls and frenzied miscommunication.
Prepare for the Peregrine saga
Based on the details that we have so far, the case of Peregrine's demise promises to be the "truth is stranger than fiction" variety. Rather than institutional sloppiness and negligence, Peregrine is looking more like the Allen Stanford story -- that is, straight up fraud.
This past Monday morning, Russ Sr., the founder, CEO, and Chairman of the privately-held broker, was found in his car with a tube running from the exhaust pipe to the passenger-side window in a failed suicide attempt. It was only after that that law enforcement and regulators swooped in and realized that, though the company claimed that its account at U.S. Bank held $225 million, there was only about $5 million there.
Where's the money? It's still unclear at this point. But Wasendorf wasn't shy about splashing around big checks. In 2008, Wasendorf, who calls Cedar Falls, Iowa home, and his ex-wife Connie, paid $500,000 for a house in Florida. In 2009, he gave $2 million to the athletic department of his alma mater -- University of Northern Iowa -- and another $100,000 to the university. The Wasendorfs have their own charity -- Peregrine Charities. The executive board consists of Russ Sr., Russ Jr., and Connie, while Amber Wasendorf is the Executive Director. Russ Sr. also had a variety of other business interests, including a real estate company in Bucharest, Romania.
We're likely in line for plenty of sordid details, as investigators dig into this messy tale. As The Wall Street Journal has reported, Wasendorf had a wedding scheduled for August 4, but ended up tying the knot two weeks ago in a shotgun wedding in Las Vegas. Bear in mind that marriage brings certain financial protections. Also potentially interesting is the fact that Russ Sr. signed power of attorney to Russ Jr. shortly after the wedding.
Though it appears that Russ Sr. wanted to shoulder all of the blame on himself, is it pos sible that others were in on what was going on?
The regulators that failed
Even if the story will end up playing out much differently at Peregrine than it has with MF Global, we're still left with one very glaring, very troubling similarity: Customers have been left in the lurch, while regulators are looking red-faced and inept.
If Wasendorf's 20-year fraud confession is indeed true, then this case looks even worse for those regulators who were supposedly overseeing futures firms. Just five months ago, the National Futures Association hit Peregrine with a $700,000 fine for failing to supervise introducing brokers and implementing effective anti-money-laundering procedures. The broker is also in the process of being sued for its connection to Minnesota Ponzi schemer Trevor Cook, who bilked investors out of $194 million. The New York Times also uncovered that multiple attempts had been made by tipsters to get the NFA to investigate Peregrine.
Eight months ago, Peregrine's Rebecca Wing hit it on the head when she shared her concern about the sanctity of the futures markets. Thanks to Peregrine, that concern is very much alive and well today.
The Motley Fool owns shares of JP Morgan Chase. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.
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