The Peregrine Financial Group Inc. trustee should delay distribution of $123 million to customers of the defunct futures brokerage until after testing customer accounts, the U.S. Commodity Futures Trading Commission said.
The tests are essential because Peregrine collapsed amid a fraud and theft of money by its founder, Russell Wasendorf Sr., the CFTC said yesterday in a filing in U.S. Bankruptcy Court in Chicago. The regulator asked the judge not to approve the payout until all the accounts of intended recipients are validated.
“The CFTC is in favor of distributing money to the debtor’s customers as soon as is reasonable and practicable,” the regulator said. “Because this case involves allegations of fraudulent books and records of the debtor’s estate, however, the CFTC believes that distributions should be made only after reasonable due diligence to ensure that the data underlying the distribution are reliable.”
Peregrine filed for Chapter 7 liquidation on July 10, hours after the CFTC sued accusing the firm and Wasendorf of misappropriating more than $200 million in customer funds.
The CFTC said it had consulted with the trustee, Ira Bodenstein, about ways to perform validity tests of commodity customer accounts to ensure money didn’t go to any claimant who may have been involved in the theft of customer money.
Bodenstein didn’t complete those tests or explain to the court what methods he followed, the CFTC said. Instead, he told commission staff over the past weekend what steps he plans to complete in the future, it said.
“The CFTC believes that it would be prudent for the trustee to complete validity testing -- and, in parallel, work on the implementation of the mechanics of the distribution -- before this court authorizes the distribution,” the commission told the judge handling the liquidation.
The CFTC said its “preliminary” investigation uncovered more than $45 million in fictitious bookkeeping entries and unusual activity or balances in customer accounts.
Bodenstein and his chief counsel, Robert Fishman, addressed some of Peregrine’s creditors today at a meeting at the federal courthouse in Chicago during which they reviewed firm financial information filed with the bankruptcy court on Sept. 6.
“Yes, ladies and gentlemen, there is a large shortfall here,” Bodenstein said of Peregrine’s client funds. That shortfall, he said, is about $190 million. The CFTC, in its lawsuit filed against the firm and founder Russell Wasendorf on July 10, accused them of misappropriating about $200 million, claimed to have been on deposit with U.S. Bank, a unit of Minneapolis-based U.S. Bancorp.
“There will not be a 100 percent return of anybody’s investment in Peregrine,” Bodenstein said. “That is a certainty.”
Neither Bodenstein, nor Fishman, nor Peregrine General Counsel Rebecca Wing -- who answered some questions from the trustee under oath at the meeting -- could say precisely how much money is in the commodity firm’s U.S. Bank customer segregated account at the center of Wasendorf’s alleged theft.
The filed bankruptcy schedules list that sum as “unknown.”
Fishman, in a post-meeting interview, said U.S. Bank account records were still being reviewed. The attorney declined to comment on the CFTC’s objection to the plan to make a preliminary distribution of $123 million.
A hearing on that request is scheduled for Sept. 12 before U.S. Bankruptcy Judge Carol A. Doyle in Chicago.
Bodenstein last week asked the judge in Chicago to allow $123 million in distributions starting with a payment that would give customers 30 percent to 40 percent of their assets trapped in the collapsed firm.
He would hold back $58 million of the funds available to deal with “variations in claim amounts,” he said in a filing. A court hearing on his plan is set for Sept. 12.
Wasendorf has been charged with lying to federal officials and is in U.S. custody. His criminal case is pending in Cedar Rapids, Iowa, where he is due to appear at a detention hearing on Sept. 11 after asking to be let out of jail before his trial. The firm’s headquarters was in nearby Cedar Falls.
The bankruptcy case is Peregrine Financial Group Inc., 12- 27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The regulatory case is U.S. Commodity Futures Trading Commission v. Peregrine Financial Group Inc., 12-cv-05383, U.S. District Court, Northern District of Illinois (Chicago).