In PFG Fraud, Everyone Loses-Except the Lawyers: The Fraud That Sank Retail Futures Broker PFGBest Torpedoed Hundreds of Introducing Brokers, Tens of Thousands of Customers and More Than a Century of Trust. Can the Retail Sector Survive without an Overhaul?

By Zwick, Steve | Futures (Cedar Falls, IA), October 2012 | Go to article overview

In PFG Fraud, Everyone Loses-Except the Lawyers: The Fraud That Sank Retail Futures Broker PFGBest Torpedoed Hundreds of Introducing Brokers, Tens of Thousands of Customers and More Than a Century of Trust. Can the Retail Sector Survive without an Overhaul?


Zwick, Steve, Futures (Cedar Falls, IA)


Eight months before Russell R. Wasendorf Sr. tried to kill himself by running a hose from his exhaust pipe into the passenger compartment of his car, he took delivery of a cache of silver coins from the New Zealand mint. They were licensed by Nickelodeon and shaped like the cartoon character SpongeBob SquarePants. They were legal currency on the South Pacific Island of Niue, had "In Sponge Bob We Trust" emblazoned across the top and had a face value of $2.

Liquidation troubles 20-year fraud

As novelty items, however, they were priced at 30 times that amount. This ratio was not much higher than the one Wasendorf achieved with Photoshop when he faked bank statements showing more than $200 million in customer segregated funds even though he'd skimmed more than 95% of those off to subsidize losing ventures around the world and to build the glittering headquarters of PFGBest, also known as Peregrine Financial Group (PFG), in Cedar Falls, Iowa. It was in the parking lot of that impressive, empty compound that he attempted to take his own life.

The ratio of cash to stated balance at PFGBest was almost as ridiculous as the image of Wasendorf sitting alone in his darkened office, a shaft of light across his sweaty brow, as he doctored those documents week after week, month after month, year after year--first in his cramped quarters in the Chicago Mercantile Exchange building, then in his roomier digs on LaSalle Street across from the Chicago Board of Trade (CBOT) and finally in his massive $18 million compound in Cedar Falls (see "PFG rap sheet," right).

"The offices never made sense," says Paul Ehrhardt, who for 20 years ran WWW Investments, which was one of PFG's first introducing brokers (IB).

They make sense now, because they were funded by raiding the more than $200 million in customer funds that were kept in segregated accounts at US Bank. The only thing that customers can hope to get back in the short-term is their share of the margin money that was on deposit with exchanges, and trustee Ira Bodenstein says there's just $181 million of that "on hand." On September 6, he asked the court for permission to begin sending $123 back in waves, with $58 million held back until he could be sure customer accounts themselves weren't part of the scam. While the move was long overdue for the liking of PFG customers, the Commodity Futures Trading Commission (CFTC) says the books are still too much of a mess for a dispersal.

Even if approved, the 30

A hearing on the dispersal is set for Sept 21, but Judge Carol Doyle already has given Bodenstein the green-light to let competing FCMs bid for the PFG accounts. If a suitable FCM emerges, the funds will be transferred to the new FCM, and customers who wish to keep trading simply can do so, while those who want to take their money and run can do so as well.

"It's very important how that's done," says Howard Marella, president of Index Futures Group, an independent IB that uses several FCMs, including PFG. "Opening new accounts takes time, especially if trusts are involved, so it would be best for customers and IBs alike if the accounts are transferred to a new FCM."

Even if an FCM steps up to the plate, it's not at all clear how many of those customers will elect to stay or how smaller IBs will manage the transition.

William Gallwas, president of independent IB Striker Securities, says, "About half our customers were impacted by MF Global, but 90% of them stayed. About 30% of our customers used PFG, and I don't know how many of them will [stay]. …

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In PFG Fraud, Everyone Loses-Except the Lawyers: The Fraud That Sank Retail Futures Broker PFGBest Torpedoed Hundreds of Introducing Brokers, Tens of Thousands of Customers and More Than a Century of Trust. Can the Retail Sector Survive without an Overhaul?
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