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.