A federal probe of Peregrine Financial Group Inc.’s $220 million shortfall in customer funds focuses on whether Russell Wasendorf Sr. used a post-office box to trick regulators into thinking they were dealing with U.S. Bancorp, a person with direct knowledge of the inquiry said.
Investigators suspect Wasendorf, the firm’s founder and chief, doctored bank statements to inflate customer funds and list the branch’s address as a mailbox he controlled, said the person, who requested anonymity because the probe is continuing. When the National Futures Association sent confirmation requests to the box in 2010 and 2011, it got phony responses vouching for the balances, the person said. Peregrine typically had about $5 million in the account, another person said.
The case surfaced on July 9 as police said Wasendorf tried to kill himself in a parking lot at the firm’s Cedar Falls, Iowa headquarters amid a regulatory push to bolster industrywide checks on funds. The weekend before the suicide attempt, he granted the NFA permission to use a new electronic-filing system that would let U.S. Bancorp directly send statements to the self-regulator, cutting him out of the process, one person said.
Peregrine filed to liquidate in bankruptcy after the U.S. Commodity Futures Trading Commission sued, claiming that client money never made it to the bank account. For example, while Peregrine reported a customer balance of about $207 million for late February 2010, the account actually held less than $10 million, the CFTC said.
Wasendorf, 64, had been resisting instructions by the NFA to start filing the customer-fund reports electronically by July 19, according to a person familiar with the matter. The order was one of several changes implemented after the implosion of New York-based MF Global Holdings Ltd. (MFGLQ:US) to increase transparency in how customer money is protected.
Patricia Campbell, a Peregrine spokeswoman in Chicago, didn’t return a phone call seeking comment on behalf of the firm and Wasendorf, who was in a coma after the suicide attempt. Teri Charest, a spokeswoman for Minneapolis-based U.S. Bancorp, declined to comment, as did Larry Dykeman of the futures association. The Chicago Sun-Times reported on the P.O. box yesterday.
The futures association said this week that Wasendorf “may have falsified bank records” and that Peregrine held $5 million of customer funds after reporting that it controlled $225 million in its U.S. Bancorp account.
The possible loss of customer money at Peregrine follows the disappearance of client cash after last year’s bankruptcy of MF Global Holdings Ltd., the futures broker run by former New Jersey Governor Jon Corzine. As much as $1.6 billion in customer funds remain missing as trustees oversee the liquidation of the firm. Under the Commodity Exchange Act, futures brokerages are required to keep customer money in a separate account to protect it from being misused by the custodians.
Peregrine started as Wasendorf & Son Inc. in 1980, according to a timeline on the firm’s website. It evolved into Peregrine in 1990 and moved its headquarters to Chicago. Two years later it was incorporated as a futures commission merchant. The firm opened a new office in 2009 at One Peregrine Way in Cedar Falls, according to the website.
Peregrine listed assets of more than $500 million and debt of more than $100 million in a Chapter 7 petition filed in U.S. Bankruptcy Court in Chicago. Separately, U.S. District Judge Rebecca Pallmeyer issued an order freezing Peregrine’s assets at the CFTC’s request, saying it appeared there was “good cause” to believe that the firm and Wasendorf Sr. violated the federal Commodity Exchange Act.
Jefferies Group Inc., which cleared trades for Peregrine, said it will hold about $125 million of cash tied to the broker as it awaits directions from regulators. Jefferies completed liquidation of Peregrine’s positions, except for a “small” Canadian account that is being transferred at the request of that nation’s regulators, according to a statement yesterday from the New York-based company.
A Black Hawk County sheriff’s officer arrived at Peregrine’s offices just after 8 a.m. on July 9, when paramedics were attending to Wasendorf, according to a report e-mailed to Bloomberg News from the sheriff’s office. A tube ran from the exhaust pipe into his car and Wasendorf was incoherent as he was taken from the vehicle, according to the report. He was later airlifted to University of Iowa Hospitals in Iowa City, according to the report.
A suicide note was found in the car that “indicated possible discrepancies with accounts at Peregrine Financial Group,” according to the report.
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