After years of concerns raised but never fully investigated by futures industry regulation, the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) took enforcement action July 9th against brokerage firm Peregrine Financial Group, also known as PFGBest. Peregrine founder Russell Wasendorf subsequently confessed to committing acts of embezzlement and fraud over the course of two decades, illegally acquiring over $100 million. Wasendorf was then arrested on charges of having lied to government regulators.
$215 million is believed to be missing from Peregrine's pool of customer funds, with a recently forged bank statement claiming $221 million in company accounts with U.S. Bank, while the bank has Peregrine on file for only $6.3 million. Four regulatory actions have been against Peregrine since 1996 - with allegations including inaccurate accounting, insufficient capital, and problems with segregating customer money.
Wasendorf in writing confessed to having spent most of the funds embezzled over the course of his career, using the money to secure firm capital, purchase PFG's corporate headquarters, and even pay regulatory fines and fees. In July, a half dozen customer claims on PFG were met with quotes of twenty-two to twenty-five cents on the dollar by CRT Capital Group, a limited liability company which deals in distressed debt.
Such offers are particularly distressing compared even to newly bankrupt commodities firm MF Global, whose claims remained at upwards of 75 cents on the dollar. The slim return on PFG claims is said to stem from uncertainty that the missing $215 million - which accounts for roughly half of Peregrine's customer funds - will be recovered any time soon, if it is recoverable at all. Texas based hedge fund Fulcrum Capital has cited a face value on most PFG claims of less than $200,000.
Since 1995, Peregrine is reported to have been on the defensive in sixty-nine total arbitration disputes with the CFTC and NFA, waged by former customers allegedly seeking to recoup invested funds. Over half of those cases have come in the last year. While the CFTC argues that it is the NFA's duty to monitor small firms like Peregrine, NFA officials are said to have privately told the Wall Street Journal that they didn't consider the enforcement actions or arbitrations faced by the firm to be cause for alarm in comparison to the number of actions brought against comparable futures dealers.
The NFA was notified last year by a national bank of a $200 million shortfall in Peregrine's accounting. Peregrine then faxed information which is said to have suggested that no funds were in fact missing. This dissonance is alleged to have not been investigated further by the NFA. It is now supposedly presumed that the faxes sent to the NFA were meticulously falsified bank statements forged directly by Mr. Wasendorf.
Wasendorf became savvy in deceiving regulators, creating false documents using scanners and common computer programs like Adobe Photoshop and Microsoft Excel. He additionally confessed to developing techniques to create doctored online bank statements, using a false post office box to intercept NFA requests, and insisting that all U.S. Bank statements for Peregrine come directly to him, so as to have ample time to forge new documentation.
It was during a routine NFA audit shortly thereafter that Wasendorf's false statements were faxed. Additional cause for concern has come from the revelation that the NFA was previously unaware that Peregrine was being audited by Veraja-Snelling & Co., a one-person firm in Glendale Heights, Illnois.
How Peregrine rose to impressive heights in the futures industry despite a long record of questionable policies and losing customer money is now a case of matching suspicion with public record. Created in 1992 and expanding tenfold two years later after absorbing a rival firm that had gone under, Peregrine is said to have targeted troubled investors with little knowledge and lots of cash.
In 1995, the NFA cited two dates in which the firm failed to have adequately segregated customer funds from their own. A 1996 enforcement action brought by the NFA allegedly cited Peregrine promotional material as misleading and problematic, namely in radio commercials which are said to have professed that customers could "turn $10,000 into $80,000", among other comparable claims. Peregrine paid a $75,000 fine, but supposedly continued running such ads for up to six months after the fine was delivered. The CFTC fined Peregrine a total of $90,000 in 2000 for supposed reporting failures and misstatements. Yet Peregrine managed to win most of its arbitration cases brought by customers, who typically cited unqualified brokers and failure to disclose risk as chief complaints.
Futures industry reform advocates have alleged that Peregrine's downfall identifies a need for more auditors of the futures industry, as well as more informed training for those who do audit, so that they might recognize these warning signs and act upon them with less reticence. How the CFTC and NFA will respond in turn remains to be seen.
It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options. If you or a family member suffered losses, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.