After MF Global, Another Brokerage Firm Collapses With $200 Million Missing
CAPITALISM, 16 Jul 2012
After the failure of the futures brokerage firm MF Global left customers missing more than $1 billion, regulators promised to tighten rules, enhance oversight and crack down on wayward firms.
But months later, regulators are scrambling to deal with the collapse of another brokerage firm.
After discovering accounting irregularities, regulators on Monday [9 Jul 2012] essentially shut down PFGBest, a prominent player in the small world of futures trading.
Now, banks accounts with customer funds appear to be short more than $200 million, regulators said. On Monday morning, according to a statement to clients, the brokerage firm’s chairman and chief executive, Russell R. Wasendorf Sr., tried to commit suicide.
While regulators are still trying to piece together what happened, the National Futures Association said the bank statements from U.S. Bank, where the money was held, might have been fabricated. The discrepancies date back a couple of years. In February 2010, an account that purported to have some $218 million, in reality contained just $10 million.
The loss of customer capital — just months after the bankruptcy of MF Global — could have major implications for regulators. Authorities recently conducted reviews of brokerage firms in the wake of the MF Global scandal, and found nothing alarming.
“How on earth can a regulated entity can just make up the bank statements for three years?” asked James Koutoulas, the head of the Commodities Customer Coalition, a group of customers still fighting for the return of their missing money following the collapse of MF Global. “I don’t even know what to say – I’m so shocked that you can forge bank statement for years, and the regulator wouldn’t just check the account balance at the bank directly.”
The futures group did not immediately respond to requests for comment.
Mr. Koutoulas, a hedge fund manager, said his firm held less than $3 million with PFGBest. Regulators said Monday that no one would be allowed to withdraw their money from the firm for the time being.
“How do you trust the financial industry,” asked a bewildered Mr. Koutoulas.
The specifics of the firm’s downfall remain hazy. Regulators said that on June 29 the firm indicated that it had about $400 million in customer money. Of that, about $225 million was located at U.S. Bank.
On Monday, the association received information that Mr. Wasendorf “may have falsified bank records.” The regulator called U.S. Bank and discovered the firm only had about $5 million on deposit.
In the futures industry, customer money is not insured, meaning that if the cash is not recovered clients will have little recourse. Regulators have proposed a number of fixes, including setting up an insurance fund to guarantee the money.
“We continue to witness circumstances which make a futures insurance fund a needed option,” said Bart Chilton, a commissioner at the Commodity Futures Trading Commission. “Such a fund is critically important. Futures customers should be protected like banking and security customers are protected.”
PFGBest is one of a handful of futures firms, which essentially line up buyers and sellers of futures contracts for commodities. The firm was wholly owned by Mr. Wasendorf. While not the size of MF Global, which held more than $5 billion in customer cash before its collapse, PFGBest was a major player in the tight-knit world of Chicago brokers.
But the industry has been under fire in recent years. Commissions have flattened, as new entrants and online trading take a bite out of business. Even the interest typically earned for simply holding customer money has been close to zero, amid the low-rate environment in the United States.
It was that weak business outlook that prompted the head of MF Global to pursue risky strategies, in an effort to bolster profit and pay for the company’s transformation into an investment bank. But the bets that Jon S. Corzine made as leader of MF Global were too risky, the market lost confidence and the firm went under. As it collapsed, the firm misused customer money in an effort to stay afloat, leaving farmers, traders and others missing more than $1 billion.
On Monday, Mr. Wasendorf, the head of PFGBest, was discovered in his car outside his company’s Iowa headquarters, according to local press reports. He was flown to University of Iowa Hospitals and Clinics in critical condition.
In addition to his financial firm, Mr. Wasendorf founded several publications during his career, including SFO – Stocks, Futures and Options, the Official Advocate for Personal Investors, according to a biography on the firm’s Web site. He also serves on the FCM Advisory Committee of the National Futures Association.
PFGBest has previously faced scrutiny. In February of this year, PFGBest was fined $700,000 for failing to detect a Ponzi scheme perpetrated by a Minnesota man who used the firm as a broker.
Ben Protess contributed reporting
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