MF Global, Barclays, Peregrine Financial… Today it seems a full-time job to cover scandals, scammers and customer fund losses. And those noted here are only a few of the latest financial industry debacles. There have been many rogue traders, such as Jerome Kerviel of France, who claims Société Générale knew exactly what he was doing. Then there is the London Whale of JPMorgan, who seemed hidden in plain sight, even to the bank’s compliance group and regulators, not to mention the usually adept Jamie Dimon. And let’s not forget the king of veneer: Bernie Madoff. In a way, the Peregrine Financial failure seems most like Madoff in that the firm was owned and run by a very visible principal, in Peregrine’s case, Russ Wasendorf Sr.
For those who aren’t aware, Wasendorf was found unconscious in his car outside the PFG headquarters in Cedar Falls, Iowa. He had attempted suicide. At the same time, regulators found discrepancies in the firm’s accounts, and especially segregated funds, that looked like they had been plundered. And the drips and drabs coming out regarding how Wasendorf allegedly covered up his tracks of gutting the funds is very similar to Madoff’s playbook. There even is a son, Russ Wasendorf Jr., who worked for the firm and was given power of attorney over it only a few days prior to his dad’s attempted suicide.
I feel once again for the customers, many of PFG’s had moved over from MF Global to a futures brokerage that seemed solid. But as someone said to me, perhaps overcompensation is a ruse to cover up misdeeds. In Wasendorf, who was arrested, it appears to be the case. It certainly was with Madoff.
Wasendorf was a visible player in the business. His firm was ranked 33 in our 2011 Top 50 FCM list, but he spent money like it was number one. PFG played host to many a luncheon at industry and exchange conferences, typically pulling in big names: Sport figures like Johnny Bench, Joe Torre and Mike Ditka to political and military elites such as Tommy Franks. He liked to run with the big boys, although he may not have been one, and seemed very generous with contributions to favorite charities. Awhile ago he told me much of his money was from investments in building or banking businesses in Romania. At the time I thought it a bit odd, but now, in hearing the rumor he might have been scammed by a Romanian “banker,” it makes sense. He also liked to live large, buying only the best food and wine and holding extravagant dinners.
But anyone who has been in the derivatives business wouldn’t find that excess unusual. It goes with the territory. But recent events make it appear he became a desperate man: Divorce, eloping in Vegas, signing over power of attorney to his son and apparently, while plundering his firm’s and customer funds, working an extreme ruse to fool the regulator, in this case the National Futures Association (NFA). And of course, the most desperate behavior: Attempting to take his life.
Questions abound: What is wrong with the futures regulatory structure that it could be fooled so easily — especially after the MF Global debacle? What steps are being taken to check financial statements independently? It’s said that the NFA now requests electronic confirmation from FCM banks, and perhaps the jig was up for Wasendorf when this went into effect. But it still doesn’t explain the firm’s internal compliance and how he was able to allegedly steal customer funds when independent confirmation was mandatory. And these underfunded accounts go back to 2010, according to the NFA. So does the entire seg funds system need to be revamped? I’m not so sure the insurance route makes sense, but at the very least, all customer funds should have to be held in a third party (approved) custodian bank or exchange.
Perhaps it’s too early to make judgement calls, but this event demands an industry gut check for the futures business to continue to exist. Capitalism works because people are motivated to keep their businesses strong and healthy to survive, and self-regulation is a subset of that. But maybe that’s no longer enough.