PFGBest revelations shock industry

July 12, 2012 12:00 AM

Still reeling from the debacle of MF Global, the futures industry now is dealing with potential fallout after learning that PFGBest Chairman and CEO Russell Wasendorf Sr. may have falsified bank records to hide PFG's failure to maintain customer segregated funds.

One insider noted, “Why would you ever have faith in this industry.”

Shock and dismay has been a common reaction and several people expressed serious concern that PFG, on the heels of the MF Global, could cause end-users to lose faith and exit the industry en masse.

Attain Capital Management noted in a blog that swift, decisive action is necessary to keep this travesty from becoming the final nail in the coffin of a marketplace that serves as a heartbeat of our global economy.

To combat a potential exodus of customers, several futures commission merchants have posted letters to customers trying to reassure them that their money is safe in futures.

Dennis Dorman, president and CEO of Dorman trading, wrote, “The MF Global situation shocked all of us, and now we have what appears to be a similar situation with PFG. The damage to our industry may take years to repair. I want to assure you that what transpired at these firms will not happen at Dorman Trading.”

R.J. O’Brien Chairman and CEO Gerry Corcoran wrote, “We at R.J. O’Brien (RJO) recognize that you may have questions about how we safeguard your assets and ensure the financial stability of our firm. I assure you that we remain committed to earning your business and confidence day after day.”

The letter includes a list of bullet points detailing due diligence procedures and distinguishes RJO from some of the policies that led to problems at MF Global and PFG.

Rosenthal Collins Group also attempted to provide reassurance and included a chart detailing how it invested customer funds and a link to its 2011 audited financial statements.

Finally, the Futures Industry Association (FIA) issued a statement saying, “The futures industry is outraged at what appears to be an extensive fraud carried out on futures customers of this firm and is appalled that customers may be victims of this deceit. Any violations of the law should be vigorously pursued and prosecuted.” It went on in the statement to reiterate recommendations it had made to reform the industry.

The Commodity Customer Coalition (CCC), the ad hoc organization founded by James Koutoulas and John Roe to represent former MF Global customers say they are "working closely with senior NFA officials" and will continue to report information on PFG as it becomes disclosable.

CCC held a public conference call on the PFG situation on Wednesday evening. Koutoulas said that the fact that PFG assets have been frozen and the firm is in a Chapter 7 liquidation instead of Chapter 11 reorganization is a positive for customers. He also noted that the bankruptcy filing indicates that PFG has considerably more assets than liabilities, which is a positve for customers, though he added, "It is too early to tell [what assets are available to customers]."

Attorney Greg Collette who has been working with the CCC on MF Global stated that he would be filing a class action suit against PFG. Details can be found through the CCC website.  

In other PFG news Bloomberg is reporting that U.S. District Judge Rebecca Pallmeyer appointed Michael M. Eidelman of Chicago’s Vedder Price PC as receiver, placing him in charge of the business. Bloomberg is also reporting that distressed debt traders are putting a very low price on PFG customer cliams. According to Bloomberg CRT Capital Group LLC is valuing those claims between 22¢ and 25¢ on the dollar.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.