Vote of No Confidence: A Call to Investigate the National Futures Association

If you have been following the blog, or know anything about Attain, then you know that last week, the industry was rocked by the revelation that Russ Wassendorf, Sr., CEO of FCM PFGBest, attempted to commit suicide, leaving behind a note that indicated he had been falsifying bank statements showing how much customer funds PFG had on deposit.  The most important parts of his confession are below (emphasis ours).

I have committed fraud. For this I feel constant and intense guilt. I am very remorseful that my greatest transgressions have been to my fellow man. Through a scheme of using false bank statements I have been able to embezzle millions of dollars from customer accounts at Peregrine Financial Group, Inc. The forgeries started nearly twenty years ago and have gone undetected until now. I was able to conceal my crime of forgery by being the sole individual with access to the US Bank accounts held by PFG. No one else in the company ever saw an actual US Bank statement. The Bank statements were always delivered directly to me when they arrived in the mail. I made counterfeit statements within a few hours of receiving the actual statements and gave the forgeries to the accounting department.

… I had no access to additional capital and I was forced into a difficult decision: Should I go out of business or cheat? I guess my ego was too big to admit failure. So I cheated, I falsified the very core of the financial documents of PFG, the Bank Statements. At first I had to make forgeries of both the Firstar Bank Statements and the Harris Bank Statements. When I choose [sic] to close the Harris Account, I only had to falsify the Firstar statements [elsewhere in signed statement Wasendorf noted that Firstar “eventually became US Bank”]. I also made forgeries of official letters and correspondence from the bank, as well as transaction confirmation statements.

Using a combination of Photo Shop, Excel, scanners, and both laser and ink jet printers I was able to make very convincing forgeries of nearing every document that came from the Bank. I could create forgeries very quickly so no one suspected that my forgeries were not the real thing that had just arrived in the mail.

With careful concealment and blunt authority I was able to hide my fraud from others at PFG. PFG grew out of a one man shop, a business I started in the basement of my home. As I added people to the company everyone knew I was the guy in charge. If anyone questioned my authority I would simply point out that I was the sole shareholder. I established rules and procedures as each new situation arose. I ordered that US Bank statement were to be delivered directly to me unopened, to make sure no one was able to examine an actual US Bank Statement. I was also the only person with online access to PFG’s account using US Bank’s online portal. On US Bank side, I told representatives at the Bank that I was the only person they should interface with at PFG.

When it became a common practice for Certified Auditors and the Field Auditors of the Regulators to mail Balance Confirmation Forms to Banks and other entities holding customer funds I opened a post office box. the box was originally in the name of Firstar Bank but was eventually changed to US Bank. I put the address “PO Box 706, Cedar Falls, IA 50613-0030”  Confirmation Forms to the Bank’s false address, I would intercept the Form, type in the amount I needed to show, forge a Bank Officer’s signature and mail it back to the Regulator or Certified Auditor.

When online Banking became prevalent I learned how to falsify online Bank Statements and the Regulators accepted them without question.

Twenty years. Photoshop.  An Iowa P.O. Box. Let that sink in.

This never should have happened. It doesn’t take someone familiar with the details to know that.  Every customer of PFGBest relied on the NFA to perform their duty and sufficiently audit the financials of PFG for each of the past 20 years, and they were let down in epic fashion. We have spent the past week speaking with clients, other victims, industry participants and members of the media, and the response has been the same across the board: outrage and disgust. Our own anger was palpable enough, but the more stories, laments and outbursts we heard, the more clear it became. It was time to fight.

There are two battles on the horizon: One, the return of PFGBest customer funds, and, two, an overhaul of both the regulations which govern us and the regulators themselves.

Fight One: Return of Customer Funds

Here is the current status of client funds held by PFGBest, based on the facts that are currently available. Of the $400 million in customer assets that were reportedly held by PFG, the NFA predicted in their member action a $220 million shortfall. All assets have been frozen since Monday, and all positions held by customers have been liquidated (although not all have been reconciled on statements yet). Chapter 7 bankruptcy proceedings are underway. In their filings, PFGBest listed between $500 million and $1 billion in assets, and $100 million to $500 million in liabilities. Both a receiver and trustee have been appointed, and the Commodity Customer Coalition (CCC) has already been in court in order to provide PFGBest clients with a voice in the proceedings.

There are a few positives to note in this situation. First, the bankruptcy was filed under Chapter 7, and not Chapter 11, which means that the firm is only liquidating assets, and not attempting to restructure as a profitable company. The perspectives that have been offered to us indicate that this, in theory, should free up more assets, more quickly to be put towards client fund distribution.

Further, the bankruptcy proceedings are, from all reports, not under the purview of SIPC as MF Global was, and instead will have the CFTC heavily involved. CFTC regulation 190.08(b) states:

Allocation of property between customer classes. No portion of the customer estate may be allocated to pay non-public customer claims until all public customer claims have been satisfied in full. Any property segregated on behalf of non-public customers must be treated initially as part of the public customer estate and allocated under paragraph (c)(2) of this section.

This would indicate that clients have top priority over any other creditors when it comes time to divvy up the company assets . It’s important to note here that, per our understanding,  the amounts in customer segregated accounts do not even become part of the pool of assets for the general creditors – they are customer funds only.

With all of this being said, we are of the opinion that we cannot wait for the bankruptcy proceedings to play out. These investors cannot put their investments on hold while the lawyers finish their squabbling.  As one client put it, “My managed futures hedge against stock market crisis periods has now become a bankruptcy claim that can’t provide that non-correlation.”

To begin with, we’d like to see an emergency motion filed for the release of the $125 million of futures customer segregated funds confirmed available by  Jefferies on July 11th(story). This is not another MFGlobal, with their desire to be a mini-Goldman Sachs creating an intense web of bank accounts making it impossible to ascertain available funds. The court must prioritize this action in order to provide the struggling clients with, at a minimum, the money that has not been spirited away so they can at least re-establish a portion of their investments. We urge the various groups partaking in the proceedings, including the CCC, to move swiftly here. If these parties are truly interested in getting clients back on their feet, now is the time to make that happen.

However, this action alone, in our minds, is inadequate, because it still leaves the clients waiting on at least half of their funds. They trusted the system. So did we, and that shored up their faith in it. This is a shared pain, but we cannot allow our clients to wallow in it. We owe them better than that.

We have called upon the CME to step up and make clients whole. In our public letter, pushing them to act, we stated:

News came out yesterday that you will be making the Farmers Insurance Fund available to qualifying victims of the PFGBest scandal. This is definitely a step in the right direction, but its impact may be limited. After all, the reimbursement is for only $25k per account, and is only available to a small group of market participants. Those who are likely more active in the markets – and thus the bulk of your profit base – won’t be able to benefit from the move, and even if they did, the reimbursement would be a drop in the bucket compared to their account balances.

Here’s the thing- $220 million is missing. With MFGlobal, the loss was at $1.6 billion. There was no way you could be expected to cover that, of course, but it didn’t stop the media and industry from demanding it, and criticizing you for not doing so. You have an opportunity here to make clients whole, without anywhere near the cost of the MFGlobal scandal. In doing so, you become champions of the industry, and send a message to futures investors that, even with reforms necessary at the regulatory bodies, the industry as a whole has their back. It’s not a giveaway, either. You don’t need to take a hyper optimistic view of the liabilities and assets of PFGBest to see that you’d most likely be able to recoup the money in the bankruptcy proceedings. In the meantime, you take the industry off pause, and show investors – your clients – that you’re in their corner.

This isn’t just about a potential slow down in volume and market participation in the short term – it’s about long-term confidence in the markets and the safety of the funds we put in it. We’ve got a long road ahead of us, but you can help the journey along. We hope you’ll do the right thing.

Given that the latest reports from the CME show a 38% decrease in trading volume in June compared to last year, an 11% year over year decrease in trading volume, and a projected $29 million in losses as a result of the MFGlobal scandal, we’re hoping somebody over there realizes that being a leader on this front and creating a fund (get everyone to chip in) which can make customers whole will benefit their bottom line in the long run. The bottom line is that we want clients made 100% whole- not just for those clients we talk with on a daily basis and care deeply about, but also for the industry as a whole to remain a viable one.

But, again, that’s just the first battle.

Fight Two: Regulatory Body Overhaul

This is where things get tricky. See, we could just focus on getting our clients their money, and letting it go. But the problem is, how, then, do we look them in the eye, and tell them that they’re safe depositing money at a new clearing firm? To be able to do that, we need to see reforms enacted immediately.

Last year, as the world reeled from the MFGlobal scandal, we put forth a series of proposals for regulatory reform. Two newly elected NF Aboard members also put forth a variety of reforms on their own, which the NFA did approve but apparently didn’t find urgent enough to get through the CFTC in a timely manner. But let’s be real – the PFGBest scandal has changed the narrative a bit from questioning not just whether we have the right rules and laws in place (most agree there are better ways to do what is supposed to be being done), to whether we have the right PEOPLE in place to insure the rules are being followed.

A cursory glance at the news coverage that emerged from this disaster reveals a myriad of disconcerting questions relating to the competence and integrity of the NFA. Here is a summation of what has been reported, with the important caveat that we are only passing on the news here, and have do not have direct access to these reports ourselves:

  • Reports have surfaced that there were emails raising concerns about PFGBest segregated account protections in front of both the CFTC and NFA as early as 2004.
  • The NFA failed to verify the mailing address of the financial institutions with whom they were attempting to ascertain account balances – despite the fact that one phone call would have revealed the scheme.
  • The NFA was, in our opinion and based on the information we’ve seen, slow in response to the reticence of PFGBest regarding authorizing electronic confirmation of account balances.
  • The NFA, according to recent reports, was made aware of a discrepancy in account balances prior to this week’s revelation after contacting U.S. Bank directly at one point, but accepted a fax that purported to rectify the account shortfall without substantiating the source of the fax as adequate contradictory proof.
  • The NFA failed to dig deeper and reveal the fraud during what was represented to market participants and the public as thorough spot checks following MFGlobal.
  • The NFA maintained Russ Wassendorf Sr.’s position on their FCM committee, even after assessing them with a substantial fine for failure to supervise earlier this year.
  • Additional reports have surfaced from current and prior NFA members regarding other areas of concern related to competency and consistency, including admitted poor understanding of the industry by auditors and abysmal responsiveness to member concerns.

The NFA is supposed to be protecting the investing public. Their website states the following on a page titled “How the NFA Fights Fraud and Abuse” (emphasis ours)

Over the years, NFA has adopted stringent rules covering a wide variety of areas such as advertising, telephone solicitations, risk disclosure, discretionary trading, disclosure of fees, minimum capital requirements, reporting and proficiency testing. Just as importantly, we perform audits and examinations of our Members to monitor compliance with those rules. We also conduct financial surveillance to enforce compliance with NFA’s financial requirements.

What “financial surveillance” was performed on PFG during the past 20 years to enforce compliance with NFA’s financial requirements? Consider that under rule 2-29(f), NFA members are required to maintain supporting information for any promotional material used. With statements like the one highlighted above promoting the NFA’s ability to fight fraud, you’ve got to wonder if the NFA holds itself to the same standard, and will be able to provide supporting information for their claim that they conduct “financial surveillance”.  We for one, believe we were misled by this promotion of their abilities, relying on their ability to actually verify bank accounts with a little more sophistication than a P.O. Box and a Fax. We’ve sent a formal request to the NFA for supporting material related to the financial surveillance conducted on PFGBest and will report what we find out, but holding your breath on that one is likely ill-advised.

This is just the most glaring public display of incompetence at the NFA. Any NFA member can spend time telling you about all the day to day issues they encounter such as previously approved disclosure documents and promotional material suddenly found to have issues when reviewed by another person.

And before you shrug all this off as only important to NFA members – you, the investor, are paying for this ineptitude. The NFA charges $.02 for every single contract traded in the U.S. futures industry, in addition to collecting membership fees from everyone under their jurisdiction – all for the supposed security of having someone watching out for the integrity of the futures markets. We don’t know about you, but given their recent track record, we’d like our money back.

With the hard-earned money of investors who have placed their faith in the markets now at risk for the second time in a year; with the investments made in name of our clients’ futures in jeopardy; with the families of hundreds of hard-working brokers, FCM employees and traders now fearful over their ability to continue to provide for themselves; with an overriding sense of this being a matter of right and wrong- we see no other possible conclusions.

Consider this our formal vote of no confidence in the reliability, effectiveness, and integrity of the National Futures Association as a self-regulatory body for the U.S. futures markets. 

We hereby call for the CFTC and Congress to launch a thorough investigation into the practices, policies and people of the National Futures Association in order to determine the extent of their culpability in recent oversights and highlight the actions necessary to restore public faith in regulation of this sphere, including, if necessary, the  revocation of their charter.

We believe in the necessity of this action, and we know there are others that agree, but we also know that one voice alone is not enough to propel action. That being said, should the members of this community and the constituents of those charged with ensuring its continued strength demand action together, our odds of making progress increase substantially. We have the right to free speech, and we have the right as members of the NFA to question their abilities.

If you believe that the NFA does a generally ok job, and that the recent scandals are simply unfortunate, isolated incidents, do nothing at this time. If you think the PFG scandal and NFA’s role therein is representative of bigger problems within the NFA, or have experienced incompetence by NFA staff and leadership yourself, sign this petition and help us make changes.

We will leave you with words from Pulitzer Prize winner Eudora Welty- emphasis most definitely ours:

“Integrity can be neither lost nor concealed nor faked nor quenched nor artificially come by nor outlived, nor, I believe, in the long run, denied.”

Now is the time to demand integrity from our regulators.

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Please direct any and all questions or comments on this statement or the petition to


  1. The CFTC failed account holders as well as the NFA. The government, because of this total failure of oversight and protection of American taxpayers, should make them whole. Then, go try and recover what you can. I do not want to wait and then get nothing back because of the government’s failure. This isn’t Madoff ripping me off. This happened because of the CFTC’s incompetence.

    Confidence in the futures market is not shaken anymore. It’s shattered.

    Take a half a day off in Afghanistan, and make these people whole. Now!


  2. I’m one of the people with my PFG account frozen. What nobody has reported so far is this: what exactly Wassendorf did to try and kill himself and what he did with the money he stole. I would bet that he lost all that money gambling, probably on commodities. By owning a commodity firm he probably thought he could be a good trader, but it doesn’t work that way.
    PFG reported $500 million to $1 billion in assets. What are the chances that those numbers are accurate? Pretty low, according to the market. If the customer’s money was stolen chances are the company assets were also stolen.
    If would be nice of the CME stepped up and covered our frozen accounts, but I rate that very unlikely.

  3. The secondary bid makes perfect sense. We have identified 44% of customer money at JEF and JPM. At least, we think that’s true. If you assume that this all takes 3 years, then a $0.22 bid would generate a 25% rate of return. Deduct for fees and these hedge funds deliver a net 15% or so IRR to their clients. This makes sense for distressed credit funds. They probably assume that any recovery from the PFG estate is just enough to cover court expenses. There’s basically nothing there. (I read somewhere that they had just asked all employees to take a 10% paycut and that people were leaving. This is a strong hint that the well was running dry.) Creditors get nothing. Potentially, the recovery goes up some if a class action can recover from the personal estate. We’ve lost half of our capital and there’s no cavalry coming to the rescue. That seems to be the story. Apologies if this is obvious to everyone.

  4. You want to do something? I just e-mailed each member of the Senate Agriculture Committee demanding that they hold Chairman Gensler accountable at tomorrow’s Dodd-Frank hearing. You can do it. It just takes 20 minutes. I have no clue if it will do any good.

  5. […] July 17th, 2012 Nice letter from Attain Capital. The National Futures Association dropped the ball, and we ought to never send them another penny […]

  6. AGREE!!! forget about confidence, what happend to uprightness, justice and fairness 101???

  7. did anyone notice that NFA has a $42 million fund balance based on their 2011 annual report (2012 should be out any day)? While it can’t cover the whole loss, it can definitely cover a piece. Also, what about the CPA “firm”. Isnt there some requirement for them to have liabilitiy insurance? Also, does NFA have D&O insurance? The problems with Peregrine start at the top–the highest levels within NFA. I know, i worked there for a very long time. Even the most senior levels of NFA have no previous work experience. They get great benefits, pretty much work 9-5, get year round flex time, great health benefits (especially the execs) and a generous 401 k match (maybe that should be suspended and put in a fund for PFG clients?). Why leave? it’s pretty comfortable. So you have a group of apathetic underachievers who have a pretty cushy lifestyle and are paid pretty well for no accountability. Time for change and it needs to start at the top.

  8. I think the government must really do something with this, or you can as well do something by increasing public awareness but it would be much appropriate if we would plan and study our every move with it. It’s like dealing with it professionally and reducing the risk of errors.

  9. You think the exchange and/or regulators should cover PFG, but not MFGlobal customers?? Your article was informative until that point. What entity is going to make PFG customers whole- the NFA as DSRO over PFG??

    CME was DSRO over MFGlobal and failed miserably. They have made no effort on behalf of the customer to return the funds they always promoted as sacred and 100% secured.

    I believe customers should be made 100% whole in both scenarios. Please do not argue PFG deserves monies back and MFG does not. They are both equally deserving.

  10. Not our argument in the least. We agree that MFG clients should be made whole as well. This particular article calls out the NFA for its failure in the PFGBest case in addition to a history of inadequacy- thus the vote of no confidence.

  11. I find it intriguing that NFA is incredibly meticulous in audits of IB’s, but apparently were a bit too lax at PFG.

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