(from the Wall Street Journal)
Even as we were railing about the Libor scandal yesterday and the erosion of trust, even as that post was hitting the blogosphere, another scandal was blowing up in Iowa, as regulators swooped down on PFGBest, a mid-sized Iowa commodities and futures broker.
The National Futures Association froze its operations and accounts in what appears to improprieties very similar to those at MF Global. Additionally, the company’s founder, Russell Wasendorf Sr., was hospitalized after what the company described as a suicide attempt.
That this comes so closely on the heels of the MF Global scandal has to be deeply troubling to the industry. That this kind of thing is happening yet again has to be deeply troubling to everybody else.
From the Journal story:
In its action, the NFA said PFGBest had about $5 million on deposit at U.S. Bank despite maintaining it had more than $225 million on deposit. Moreover, the NFA believes that when PFGBest reported bank balances of more than $200 million in February 2010 and March 2011, in fact it had less than $10 million for each one of these months. Mr. Wasendorf “may have falsified bank records,” the NFA said.
As of June 4, PFGBest, which is largely engaged in retail commodities and foreign-exchange trading, reported about $400 million worth of client funds on deposit to back up outstanding trades to the Commodity Futures Trading Commission, making it the 37th-largest futures brokerage by client funds, according to the CFTC.
PFGBest’s woes come as another blow to a derivatives industry still reeling from the collapse of futures brokerage MF Global last year, which left thousands of retail and institutional clients nursing financial losses.
In the wake of MF Global last year, PFGBest had a few now-ironic posts on its website, including this letter from Wasendorf:
In the wake of MF Global Holdings Ltd. filing for Chapter 11 protection yesterday, and continuing investigation into whether and how MF Global failed to keep clients’ collateral separate from its own accounts, I would like to reaffirm the absolute dedication of PFGBEST to protect you and your PFGBEST accounts.
PFGBEST is not only customer-centric, but compliance-focused. We consider it a privilege to conduct business with you and to be an advocate for you. We abide by all regulations mandated by the CFTC and the rules of NFA to hold customer funds in segregated accounts that are always separate from operational funds. PFGBEST reports daily and monthly to the regulators concerning customer segregated funds. An independent, certified audit is conducted annually in addition to periodic, regular audits by NFA and information requests from the CFTC and exchange representatives.
It is our policy to keep extra funds on deposit in our customer segregation accounts to protect you.
Ouch.