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(Note: The original version of this story contained an incorrect link to the stock page for Principal Financial Group. There is no relationship between Principal and Peregrine Financial Group or PFGBest.)

Nine months after the collapse of MF Global, another futures trading firm has imploded. Peregrine Financial Group (PFG), also known as PFGBest, filed for Chapter 7 in federal bankruptcy court on Tuesday. The filing occurred a day after the firm's founder, Russell Wasendorf Sr., attempted suicide. Wasendorf is accused of misappropriating customer funds, making false statements and fraud.

Details of what happened are still emerging, but the National Futures Association alleges that PFG claimed to have in excess of $220 million in customer accounts, when it actually only held $5.1 million. Wasendorf is said to have falsified bank statements as far back as February 2010. Regulators discovered the discrepancy while researching the company's possible involvement with a Minnesota Ponzi scheme.

The debacle extends beyond PFG. Wasendorf owned several other businesses, including SFO Magazine and W&A Publishing/Trader's Press. These businesses have been shut down. (The Des Moines Register says 125 people who worked for Wasendorf's various businesses have lost their jobs.) The implosion also directly affects me because W&A Publishing is the publisher of my book, "Better Good Than Lucky." My book is now in limbo because although I own the copyright, W&A Publishing holds the license to publish it. (And with no publisher, there is no way to replenish bookstore inventories.) Though I'm not happy, I feel worse for the people I knew at Wasendorf's companies who lost their jobs.

So what happens now to PFG? Customer accounts are frozen and PFG is being liquidated. Wasendorf's other companies will probably be liquidated as well. A new trustee was just named late on Wednesday and has his work cut out for him. It will likely be a while before PFG customers know how much money they will get back.

Had this been a traditional brokerage firm, as opposed to a futures firm, the outcome for investors would be different. The Securities Investor Protection Corporation (OTCPK:SIPC) returns cash, stock and other securities when a brokerage firm fails. Should a brokerage firm go bankrupt, the SIPC returns the assets held in the account, typically within one to three months. There are limitations and the SIPC does not protect against bad investments (or bad investment advice), only failed brokerage firms. More information can be found on the SIPC's website. (You can see reviews of the five discount brokerage firms most popular among AAII members in our Discount Broker Guide.)

The bigger question is why didn't regulators catch this alleged fraud sooner, especially in the wake of MF Global? News reports say PFG had been investigated before, including for complaints about the handling of customers' money. Yet, it does not appear that regulators pushed for electronic verification of account funds with PFG's bank until the missing money was discovered on Monday, the same day that Wasendorf attempted suicide. Rather, Wasendorf allegedly sent doctored bank statements, from a post office box he controlled, to regulators. And regulators accepted those statements as being factual.

Clearly, the National Futures Association and its overseer, the Commodity Futures Trading Commission, need to be more aggressive about how they monitor futures firms to ensure customer money is being handled properly. Reuters reported last night about a plan to force executives to sign off on major withdrawals from customer accounts. This a positive step, but it does not go far enough to catch the actions of malfeasant executives. Rather, a more aggressive monitoring process that includes routine electronic verification of account balances is needed.

Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Peregrine Financial Group: Another Futures Firm Implodes (And What Regulators Should Do)