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Peregrine Financial Group – A major scam in the U.S. forex futures market

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The Peregrine Financial Group (PBG), also known as PBGBest, is a name that will go down in infamy as a scam of major proportions in the U.S. domestic futures market. It was shut down in 2012, when it was discovered that nearly $220 million in customer deposits had vanished. The firm immediately earned the tagline that they were “best at making money disappear”. Many consumers and investors may never have heard of this scandal, since it was overshadowed at the time in the press by the $1.6 billion debacle that occurred over at MF Global (MFG), a much larger futures behemoth.

Both firms, the nation’s finest and largest examples of a non-bank, non-clearing Futures Commission Merchant (FCM), prompted immediate calls for tighter regulations of the entire futures industry. Whereas MFG was a relative newcomer since 2007, Peregrine has been a long established firm, founded in 1980 by Russell R. Wasendorf, Sr. in his hometown of Cedar Falls, Iowa. The company started as an advisory firm that specialized in forecasting prices in commodities, forex and other financial markets. PBG soon took on customers and formed a broad network of futures and option brokers.

The company prospered and actively acquired other related firms in the process to fuel its dynamic growth. It was named a “Top 50” broker for eight years in a row. Success, fame, and prosperity followed the firm, but it all came to a crashing end on July 9, 2012. Coincidentally, on the same day as its founder and chairman, Russell R. Wasendorf, Sr., was hospitalized after a failed suicide attempt, PBG staff suddenly froze client accounts. They had discovered why the boss was away that there was a $220 million shortfall in cash balance accounts. The staff then advised the National Futures Association (NFA) that their founder “may have falsified bank records”.

On July 10, 2012, the Commodity Futures Trading Commission (CFTC) announced that it had “filed a complaint in the United States District Court for the Northern District of Illinois against Peregrine Financial Group Inc. (PFG), a registered futures commission merchant, and its owner, Russell R. Wasendorf, Sr. (Wasendorf).  The Complaint alleges that PFG and Wasendorf committed fraud by misappropriating customer funds, violated customer fund segregation laws, and made false statements in financial statements filed with the Commission. “

A bankruptcy trustee was soon appointed to manage the ensuing Chapter 7 proceedings of registering claims and liquidating assets. As of September 30, 2015, there was actually good news to report. Yes, the $220 million in client deposits did disappear, but there have been significant recoveries, as well. To date, former account holders have been paid $213 million, roughly 49 cents on the dollar. The trustee has paid down necessary expenses of $20 million and currently retains $67 million, as a reserve for the IRS and other unresolved claimants.

In cases of this magnitude and even for those of a much smaller nature, it is rare that clients ever see a dime returned to them. By the time that the fraud is uncovered, the perpetrator has usually already burned through the missing funds, funding a lavish life style that befits his level of embezzlement. After court costs, fines, and penalties, the funds that remain are typically next to nothing, when compared to the total amount of client account shortfalls.

In this case, the bankruptcy trustee was able to locate about half of the missing capital, after expenses. There are also a few open items that must work their way through the trustee process. For one, the IRS has assessed the trust for back taxes, penalties, and interest for unreported income $97 million over a five-year period for Wassendorf, but there may be more to come at a later date. There are also other lawsuits pending that must be addressed in due course to determine final liability settlements.

Peregrine Financial Group will go down in the annals of major scandals that demonstrate that even in a jurisdiction where the regulators are the best the world has to offer, crooks can still maneuver about. They can operate stealthily for a period of time, absconding with other peoples’ money in the shadows by falsifying financial reports and records until someone becomes wise to their tricks. From that point on, it is a mad scramble of every creditor looking out for himself or herself before the bankruptcy trustee.

How does one protect against this type of fraud? Unfortunately, Peregrine and others like it, including Bernie Madoff’s monster Ponzi scheme, are very difficult to protect against. If the manager in charge is hiding losses or his own embezzlement by falsifying client statements and regulatory filings, then detection is that much harder. Hedging your risk for falling victim to this type of poor asset manager can only be achieved through diversification. Spread your funds around. Do not keep all of your eggs in one basket. If your withdrawal requests are ignored, then it might be too late to act.

As for forex funds at risk, the golden rule is to never invest funds in foreign exchange trading that you cannot do without. Futures and forex are extremely high risk for a good reason. Yes the rewards can be greater than with other investment securities, but you can also lose your entire stake due to the whims of the market or to the schemes of a shrewd fraudster. Be cautious, and be smart!