Futures industry shaken as another broker goes bankrupt

Reuters / Russell Wasendorf Sr., arrested last Friday, confessed to a 20-year fraud at Peregrine Financial Group (PFG), his now-bankrupt Iowa brokerage, saying business troubles and his “big” ego left him no choice: “So I cheated.”

In the dramatic conclusion to a week-long saga that has shaken trader confidence in the trillion-dollar U.S. futures markets, authorities released parts of a detailed statement in which one of the industry’s best-known veterans explained how he used little more than a rented P.O. Box, Photoshop and inkjet printers to dupe regulators in a more than $100 million scheme.

FBI agents arrested Wasendorf, 64, at the Iowa City hospital where he had been since trying to commit suicide on Monday, July 9. He was charged with making false statements to regulators, but prosecutors said they would seek more charges. He faces “decades in prison,” assistant U.S. attorney Peter Deegan said.

In the signed statement, left along with a suicide note and released as part of the criminal complaint, Wasendorf said he began forging bank documents after the business he built from his basement risked failing without additional capital. The timeline suggests his deceit lasted almost the entire life of his brokerage.

“I was forced into a difficult decision: Should I go out of business or cheat?” he wrote.

“I guess my ego was too big to admit failure. So I cheated,” the note said. It was discovered on Monday in his car outside the company’s new Iowa headquarters, where Wasendorf had tried to kill himself by funnelling in tailpipe exhaust.

The arrest ends much of the mystery that has enveloped the futures industry this week. But it will not ease the pain of betrayal in the small Iowa town that Wasendorf made his corporate home in 2009, nor the anger of a financial industry still smarting from the failure of rival brokerage MF Global.

“I have committed fraud,” Wasen-dorf wrote in the note, the contents of which he later told authorities were true. “I feel constant and intense guilt.”

Yet he also wrote in almost boastful detail about the “blunt authority” that allowed him to control the flow of documents into the company; how he used a simple post office box to trick “unquestioning” regulators; and his skill in turning out forged bank statements within hours that “no one suspected.”

Regulatory shock

Wasendorf’s downfall has shocked his family and colleagues and has shattered his image in his adopted hometown of Cedar Falls, Iowa, where he moved PFGBest’s headquarters in 2009 after building an $18-million complex that included day care, a four-star cafeteria and state-of-the-art geothermal climate control.

With an unusual empire including a Romanian property company and a glossy magazine, Wasendorf’s ego stood out even in the rough-and-tumble world of the Chicago futures industry. He proudly underwrote big-name guest speakers at industry events and held private VIP receptions for them, and flashed a jewelled pinky ring. His favourite quote, according to his Facebook page, was, “If I wanted patience, I would buy it.”

More widely, his fall also rattles investors’ confidence in the pillars of the futures markets: brokers’ safeguarding of client money, and, equally important, regulators’ ability to police the industry.

The prolonged nature of the fraud is sharpening criticism of regulators like the National Futures Association, the industry group that had first-line responsibility for overseeing non-exchange brokers like PFG. MF Global, by contrast, is believed to have tapped into client funds in a desperate bid to keep itself afloat during its final days.

“It’s stomach churning,” said Lauren Nelson, director of communications for Attain Capital, an introducing broker specializing in managed futures in Chicago that had accounts at PFGBest. “It’s unbelievable that this was able to be going on for so long without the regulators noticing.”

“Without question”

The federal complaint alleges that, from 2010 through July of 2012, Wasendorf made false statements to the U.S. Commodity Futures Trading Commission regarding the value of customer segregated funds held by Wasendorf’s Iowa-based company.

But Wasendorf in the statement said the forgeries started “nearly 20 years ago,” suggesting he was fooling regulators from the very beginning. Peregrine was first registered as a futures brokerage in 1992, according to its website.

The deceit evolved with the world, and Wasendorf “established rules and procedures as each new situation arose.”

When auditors began contacting banks directly to verify brokers’ balances, he opened a post office box in the name of Firstar Bank — later U.S. Bank — and intercepted the confidential forms, he said. He returned doctored statements that had been inflated by more than $200 million, more than half of PFGBest’s total customer funds.

As he quickly learned how to falsify online bank statements amid the rise of Internet-based banking, Wasendorf wrote that “regulators accepted them without question.”

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P.J. Huffstutter is a reporter for Reuters.

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