July 10, 2012 – PFGBest Futures Brokers Have Accounts Frozen: The U.S. futures industry faced another potential setback Monday after a midsize broker froze client accounts, disclosed that its founder had been hospitalized following a suicide attempt, and faced closure after being accused of misstating financial records. Note: your editor has an account with PFGBest and his assets are frozen.
Late Monday, the National Futures Association, the futures industry’s self-regulatory body, said it has taken an emergency enforcement action against broker PFGBest’s parent company, Peregrine Financial Group Inc., as well as a unit, Peregrine Asset Management Inc. Under the emergency enforcement action, the firm isn’t allowed to accept any funds or place trades for customers.
Peregrine, based in Cedar Falls, Iowa, couldn’t be reached for comment on the NFA action, but in an earlier statement to clients said “some accounting irregularities are being investigated regarding company accounts.”
In its action, the NFA said PFGBest had about $5 million on deposit at U.S. Bank despite maintaining it had more than $225 million on deposit. Moreover, the NFA believes that when PFGBest reported bank balances of more than $200 million in February 2010 and March 2011, in fact it had less than $10 million for each one of these months. Mr. Wasendorf “may have falsified bank records,” the NFA said. Editorial note: This is misleading in that PFGBest has two primary banks (U.S. Bank and Chase Manhattan Bank of New York) with U.S. Bank deposits totaling $5 million and Chase totaling $200 million. After liquidation of assets, account holders should see from 50 to 75 cents on the dollar. This is MF Global (Lind-Waldock) all over again and effectively “kills” the futures industry.
As of June 4, PFGBest, which is largely engaged in retail commodities and foreign-exchange trading, reported about $400 million worth of client funds on deposit to back up outstanding trades to the Commodity Futures Trading Commission, making it the 37th-largest futures brokerage by client funds, according to the CFTC.
“What this means is no customers are able to trade except to liquidate positions. Until further notice, PFGBEST is not authorized to release any funds,” said PFGBest in its statement.
Pictured above, Russel R. Wasendorf Sr. Note: I don’t think he’s smiling as much today.
Also in the statement, the firm said Russell R. Wasendorf Sr., its founder, chairman and chief executive, had experienced a “recent emergency” and described it as a “suicide attempt.” A spokeswoman for PFGBest said Mr. Wasendorf was in critical condition in a hospital. Note: This is after the firm lost over $30 million trading the FOREX markets (currencies).
PFGBest’s woes come as another blow to a derivatives industry still reeling from the collapse of futures brokerage MF Global last year, which left thousands of retail and institutional clients nursing financial losses. Note: They call it the derivatives industry because the price of futures contracts, such as Gold and Soybeans, are derived from the price of underlying assets.
Both industry and government regulators have promised to crack down on fraud issues related to securities trading; on Monday, the PFGBest allegations sent shock waves through the trading community, especially in the commodity-trading capital of Chicago.
“This is an abysmal failure by the regulators,” said Lauren Nelson, director of communications for Chicago-based Attain Capital Management, a broker that used PFGBest to process transactions. Note: This is the understatement of the year. After MF Global, regulators were suppose to fix the audit trail and internal control issues and audit all FCM’s (Futures Commission Merchants).
The CFTC earlier this year conducted a spot check of all futures-commission merchants, including PFGBest, where it found no material breaches of customer-funds-protection requirements. Note: Then how were PFGBest traders able to access client funds!
Reached by email late Monday, Bart Chilton, a commissioner with the CFTC, said “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 comments were echoed by James Koutoulas, chief executive of Typhon Capital Management. Typhon, a futures-trading firm, routed business through both MF Global and PFGBest.
Further fallout from PFGBest, which had a large individual investor clientele, according to Mr. Koutoulas, would likely hamper long-running efforts among futures brokers and exchanges to develop a retail customer base.
Several PFGBest’s clients said they were able to liquidate some of their holdings, although they were unable to trade. Note: This is not true, all assets are frozen effective July 9, 2012.
“Now, there’s really nothing I can do, or any of the other account holders can do,” said Kevin Davey, a 45-year old independent commodity futures trader in Cleveland. “The worst case is that everything remains frozen, kind of like what happened with MF Global.” Note: The worst case is what is happening now.
The Peregrine spokeswoman said representatives of the NFA and CFTC were at the company’s Iowa offices Monday. She said PFGBest employees across the U.S. were at risk of losing their jobs. PFGBest has about 200 employees across the U.S., mostly in Chicago and Cedar Falls. Staff were briefed on the developments by management Monday. PFGBest’s executive committee is making decisions for the firm, according to the spokeswoman.
It’s not known whether its staff can be paid, and employees have been told that the company isn’t likely to survive, according to a person familiar with the matter. Click the link below for the complete story.
The Master of Disaster