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Tags: CFTC | Iowa | Broker | pfgbest

CFTC Chief Admits Failure as Iowa Broker Says Money Gone

Wednesday, 18 July 2012 07:56 AM EDT

U.S. futures market regulators scrambled to take new steps to prevent another broker from dipping into client funds, while it emerged that the founder of Peregrine Financial Group had already spent the more than $100 million he took from clients to keep his firm afloat.

As the chief of the Commodity Futures Trading Commission acknowledged that the regulatory system had failed to protect customers of PFGBest, as Peregrine is known, new details from Russell Wasendorf Sr.'s confession and suicide note showed a man embittered by "mean spirited" regulators and distraught over deceiving his own son.

PFGBest collapsed last week after Wasendorf Sr. attempted suicide, bringing to light a fraud that had lasted nearly two decades. It dealt a new blow to confidence in the futures industry, less than a year after MF Global Holdings Ltd.'s bankruptcy, which left customers with a $1.6 billion shortfall and is still being investigated.

Wasendorf, being held in an undisclosed location after being arrested on July 13, lacks the funds to hire a lawyer and will be represented by a public defender, said Chicago-based attorney Tom Breen. Wasendorf had intended to hire Breen.

"I know you will be shocked to discover my crimes," Wasendorf, 64, wrote to his son, Russell Wasendorf Jr., in the suicide note, a copy of which was read to Reuters by a source close to the situation. "I never wanted you to know the kind of guy I really was."

Regulators including the Commodity Futures Trading Commission have been criticized for failing to catch the deceit. Wasendorf blamed them for driving him to commit fraud by undermining his company in 1993, just a year after it was formed, the Wall Street Journal reported.

In a signed letter found with his suicide note last Monday, Wasendorf said that his scheme began around 1993, when a CFTC investigator in Kansas City sought to fine his firm for a violation involving customer funds, according to the Journal.

The CFTC "harassed" him by conducting six on-site audits over five months, he wrote. He said a "technical violation" then raised his capital requirements.

"Most of the misappropriated funds went to maintain the increasing levels of Regulatory Capital to keep in business and to pay business," he wrote.


Meanwhile regulators moved quickly to close up the loophole that Wasendorf exploited to fool authorities. He confessed to using doctored paper bank statements to show inflated customer funds, resisting efforts to allow regulators to check his bank accounts electronically. He allowed them access on July 8, a day before he attempted suicide.

CFTC Chairman Gary Gensler, in testimony before the Senate Agriculture Committee, outlined his agency's plans to contain the fallout from the Peregrine case, including new rules that would allow direct access to brokers' bank accounts and a reassessment of the role of self-regulatory organizations.

"Although we do not know the full facts of what happened in this matter, the system failed to protect the customers of Peregrine," Gensler said. "Just like the local police cannot prevent all bank robberies, however, market regulators cannot prevent all financial fraud.

"Nevertheless, we all must do better."

The National Futures Association (NFA), which was Peregrine's front-line regulator, together with other SROs including CME Group later said that they would "immediately begin the process of confirming the balances of customer segregated bank accounts for all (futures brokerages)."


In his suicide note to his son, Wasendorf said: "I beg your forgiveness ... Your mistake was trusting your father, nothing more." Wasendorf Jr. was chief financial officer of Peregrine.

But he had no sympathy for regulators: "I have to say I don't feel bad about deceiving the regulators," the note said. "They made the decision to be my enemy."

Gensler and other regulators have been in the hot seat over recent scandals at major financial companies, raising almost as many questions about oversight as about the conduct of the companies themselves.

A botched trading strategy at JPMorgan Chase that triggered a mounting multibillion-dollar loss and a widening scandal over large banks' alleged manipulation of Libor have also sent shivers through markets and led to calls for tougher financial rules.

"If anyone is wondering why we need these rules, all you need to do is turn on the news," Senator Debbie Stabenow, chairwoman of the Senate Agriculture Committee, said in a statement.


As senators questioned Gensler over the fraud at PFGBest, many criticized the National Futures Association.

"I find that mind-boggling that no one at NFA could discern this," said Senator Tom Harkin, an Iowa Democrat.

Gensler acknowledged the need for the CFTC to "examine the examiners."

"The recent events at Peregrine highlight the necessity of looking at the decades-old system of SROs as first-line regulators and the commission's role in overseeing SROs," Gensler said.

New rules aimed at boosting protections for futures customer money were sent to commissioners' offices on Monday evening, Gensler told reporters after the hearing.

In addition to improving direct access to brokers' bank and custodial accounts, the rules would give customers more transparency into their holdings. Some brokers including independent Rosenthal Collins Group and Citigroup have moved over the past week to open a window on customer funds in an effort to restore traders' trust in the system.

But even as lawmakers agreed on the need for better customer safeguards, Republicans pulled no punches in their critique of the CFTC's swaps and futures regulations, mandated by the 2010 Dodd Frank law.

"The CFTC has told no one how it plans to coordinate the implementation of the over 30 rules and thousands upon thousands of pages of new regulations it has created," said ranking Republican Senator Pat Roberts in his opening statement.

"And as if this weren't bad enough, the CFTC isn't doing a good job of what it was created to do and that is police the financial streets."


The MF Global and PFGBest scandals have raised questions about the strength of federal commodities regulations designed to segregate and protect customer funds.

The NFA eventually uncovered the fraud after it sought to confirm PFGBest's bank balance electronically. Prior to that, the NFA had conducted such checks through the mail. Wasendorf used a post office box to intercept the bank confirmation requests and forge documents to conceal the missing customer money, according to an FBI complaint.

Gensler said on Tuesday that the NFA had completed an audit of the brokerage in May 2011 and was in the process of conducting another one over the past few weeks when the fraud was uncovered.


On the same day as Wasendorf's arrest, the CFTC moved to approve new customer protection rules requested by the NFA.

One such rule, named for MF Global's former CEO, Jon Corzine, would require top executives at futures brokers to sign off on major withdrawals from customer accounts.

But Gensler said on Tuesday that more steps need to be taken.

"I believe it is critical that we bring the regulators' view of customer accounts into the 21st century," he said. Letters confirming bank balances "must come directly to regulators from banks and custodians," he said.

Gensler said he hopes to incorporate the new NFA regulations approved last week into the commission's own rules, so it can "directly enforce" the reforms.

He said he has asked for a public roundtable to discuss what other customer protections are needed.

© 2023 Thomson/Reuters. All rights reserved.

Wednesday, 18 July 2012 07:56 AM
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