Hundreds of Millions in Client Funds Go Missing At Another Commodities Firm

By Pam Martens: July 10, 2012 

One would have thought that after $1.6 billion of customer funds went missing at MF Global, the large commodities firm run by former U.S. Senator and Governor from New Jersey, Jon Corzine, that the Commodity Futures Trading Commission would have verified bank balances at every futures merchant it regulates.  It didn’t.

In an enforcement action announced yesterday, the National Futures Association (NFA) said that accounts have been frozen, except for liquidating positions, at Peregrine Financial Group, Inc. (PFG) and Peregrine Asset Management.  According to the NFA, PFG was reporting $400 million in segregated funds for customers and a bank balance of $225 million. (The difference would have conceivably been margin balances.) The actual bank funds that can now be accounted for are $5 million.  According to the NFA, the dramatic overstatement of bank balances dates back to at least 2010. 

According to media reports, the firm’s founder and CEO, Russell R. Wasendorf, Sr., attempted suicide and is in the hospital. The firm operates PFGBest, whose web site bills itself as “one of the largest non-clearing U.S. Futures Commission Merchants, with customers, affiliates and brokerage offices in more than 80 countries.” 

It should be noted that while the firm was reporting to its regulators $400 million in segregated funds for customers, that doesn’t mean there won’t be considerably more than that missing once client account statements are totaled. If one is lying about bank balances, one is usually lying about other balances.  

It is more than three years since clients were fooled into believing they had account balances of $65 billion with Bernard Madoff’s firm.  That multi-decade scheme was only possible because regulators never verified bank balances or looked at actual securities held for the client accounts.  (There weren’t any securities held for client accounts because Madoff didn’t actually buy the securities reflected on the client statements.)

That regulators are still not personally verifying the information the firms are providing is an outrage against the investing public.  Expect more Congressional hearings while Republicans continue to explain to their constituents why we don’t need government oversight of markets.

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