PFGBest Update: One Phone Call

More news on how badly botched the verification of segregated accounts appeared to be at PFGBest in the Wall Street Journal:

Officials of the National Futures Association, an industry self-regulator, reached out to U.S. Bank in early 2011 seeking to confirm that PFGBest’s customer-account figures matched the bank’s own account, according to a person familiar with the investigation. The regulator received a response showing that the client-fund account held less than $10 million, which was far below what it was supposed to contain.

Peregrine Financial Group filed to liquidate in bankruptcy on Tuesday, after regulators sued the futures brokerage for about $215 million of client funds allegedly missing from the firm. Jerry Dicolo reports.

The NFA a few days later received a fax purporting to be from U.S. Bank that showed that the account was whole, with more than $200 million, according to this person, who added that investigators now believe the fax came from a number controlled by Mr. Wasendorf. It isn’t clear whether the NFA followed up on the original report that the account was dramatically underfunded.

If this is true, it is simply unbelievable.  How in the world is a red flag THAT big missed? Let’s take a look at the series of events. You speak with the bank, and you find out there’s a shortfall in segregated funds. Shortly thereafter, you receive a fax that negates the news you had previously received directly from the bank. You don’t call the bank back? You don’t check the number it was sent from? You don’t launch one of your legendary surprise audits? You just assume this magical fax is legit? It isn’t like the account was underfunded by a couple of bucks. This was a massive shortfall.

Forget red flag- this was a flashing neon sign that spelled fraud.

7 comments

  1. I appreciate your blog on this issue and also you past criticism of the NFA. As a member of the NFA myself and my company, I have to say the NFA dropped the ball. We pay our dues and the customers pay a “fee” every time they trade. This is supposed to be be for the enforcement of regulations. Well, they blew it with PFG. Wasendorf is a terrible individual ( among other things) and a thief. But the NFA is just as much to blame. Any funds that customers or any member lost in PFG should be made whole by the NFA. They are responsible and should share equal blame.

  2. Agree 100%. The regulator will argue in its defense that the fraud was exposed as a result of its pressure. In effect, you can’t blame the cop for discovering a burglary. The trouble with that logic is that the cop caught the burglar but only after the entire neighborhood had been robbed – because the cop sat in station eating donuts instead of being out on the beat. Had their oversight been effective back in 2010 (or earlier), the loss of seg funds could have been much smaller. Other than the NFA, if the FBI can find a conspiracy with collaborators within US Bank, the bank custodian is another source of deep pockets to help with eventual recovery. The WSJ has reported that the probe now includes US Bank.

  3. […] If this is true, this is unacceptable. PFGBest Update: One Phone Call | Attain Capital Managed Futures Blog […]

  4. It’s even worse than that. It’s more like the cop caught the burglar only after the burglar voluntarily left a note expressing remorse for the robbery.

    So sad to watch an industry that I’ve been passionate about for two decades totally collapse in a morass of fraud and deceit.

  5. Good point, David. My (desparate) hope that a conspiracy can be uncovered has probably now been dashed by Sr.’s suicide note. It appears to have been a one man job as incredible as that sounds. While a class action against NFA is the obvious path to recovery, Koutoulas poured cold water on that on Wednesday. He claims that regulators are very difficult targets. I would imagine that there is probably not much of anything in the PFG estate, especially if the fictitious US Bank balance was included amongst the assets indictaed in the bankruptcy filing. That leaves Sr’s personal assets. What is a resturant building or two in Cedar Falls, IA worth? A “white knight” rescue (benevolence of someone like the CME) is unlikely. And it is now raining out.

    What a great week……….

  6. Check the NFA website, under arbitration and mediation for this company, there were 15 cases against PFG in year 2011 alone, and EVERY SINGLE one of those cases was dismissed by the NFA Aribitration, what that tells you about the NFA Arbitration system???

    I can’t help but to think that tjose arbitrations are and were bribed, I have a personal experience with their unjust verdict regarding my case and a broker who scammed me into 850,000.00 dollars, and when I took my case to NFA, ( BTW, that was the only choice, NFA Arbitration), not only they dismissed all my claims, they even gave the broker 75,000.00 dollars award. My attorney who was an ex vice president of FINRA in one of the southern states was completely shocked by the verdict.
    Any suggestion??
    Where was NFA for the past 20 years, now all of a sudden, they are taking credit for their action against PFG??
    That’s laughable!!!!!

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