Business | Economy

The fall of Iowa brokerage presaged in Christmas toast

Peregrine’s failures are focusing scrutiny on the regulatory ability of the Commodity Futures Trading Commission

  • Bloomberg
  • Published: 00:00 July 16, 2012
  • Gulf News

The building that houses the Chicago headquarters of brokerage firm PFGBest in Illinois, last week
  • Image Credit: EPA
  • The building that houses the Chicago headquarters of brokerage firm PFGBest in Illinois, last week. The futures brokerage declared Chapter 7 bankruptcy protection amid accusations of misappropriating more than $200 million in customer funds.

New York/Chicago: Peregrine Financial Group employees gathered for their annual holiday party at the River East Art Centre, overlooking the Chicago River. After enjoying appetisers and an open bar, they heard the kind of sombre note you don’t expect from the boss at such a fete: even businesses that get off to a good start aren’t guaranteed to last.

That was the gist of the remarks last December from Russell Wasendorf Sr., chief executive officer of Peregrine, the futures brokerage he founded. Wasendorf rambled and said that while he was proud of creating Peregrine after his first year in business, you never know how things will turn out, recalled Phil Flynn, a former analyst at Peregrine’s futures brokerage, PGFBest, who attended the party.

“Finally he just stopped and said, ‘Sorry, I didn’t mean to be a downer at the Christmas party,’” Flynn said. “It took a lot of people aback. Was it an indication of what was to come? It could be.”

Seven months later, Wasendorf, 64, drove to the parking lot of Peregrine’s headquarters in Cedar Falls, Iowa, and tried to asphyxiate himself by funnelling tailpipe exhaust into his silver Chevrolet Cavalier, authorities said.

Regulators were on the verge of discovering a $220 million (Dh808.07 million) shortfall in his customers’ money. A day later, the brokerage filed for Chapter 7 bankruptcy protection as its founder lay in a coma in an Iowa City hospital.

PO Box

A post-office box in Cedar Falls is at the centre of the US probe of the shortfall. It focuses on whether Wasendorf used the box to trick regulators into thinking they were dealing with US Bancorp, a person with direct knowledge of the inquiry said. Investigators suspect he doctored account statements from the lender to inflate customer funds and listed the bank branch’s address as a mailbox he controlled, according to the person.

The sudden reversal of fortune for Wasendorf has shaken his adopted Iowa town, reverberated in the halls of Congress and forced new scrutiny on the regulatory ability of the Commodity Futures Trading Commission (CFTC). It also has reignited a debate about whether the money of futures-brokerage customers is safe — less than a year after the failure of MF Global Holdings, whose clients are still missing $1.6 billion.

Wasendorf had maintained all the appearances of a successful financial services executive, founding the Peregrine Charities in 2004 with his family to help battle rare paediatric diseases. The charity also provided assistance for children’s medical treatment, according to the group’s website.

He had a personal touch in his adopted home town. Two weeks ago, clients, family and friends received a small green envelope with a wedding invitation from Wasendorf and Nancy von Goeben. The ceremony would take place on August 4 at the Bethlehem Lutheran Church in Cedar Falls, with a reception at the couple’s residence. “Instead of showering us with gifts, email your favourite family recipe along with a photo and a special story,” it read. Each guest would receive a cookbook with the recipes.

Wasendorf’s culinary interests extended to his company, which he relocated from Chicago in 2009. Concerned that employees who followed him might sniff at the local fare, he opened an Italian restaurant, myVerona, which offers braised rabbit cacciatore and crispy calamari fritti. The restaurant, on Main Street in Cedar Falls, posted a sign last week stating that it was “closed until further notice.”

Employees taken care of

Wasendorf took a group of its employees to Italy in 2010, Katy Reiter, 23, a former server at myVerona who quit in March, said. Those who couldn’t go received cash bonuses. About 30 employees spent a week travelling around the country, staying at luxury hotels and visiting local wineries, Reiter said.

Restaurant employees called Wasendorf ‘Papa’, she said, and he spent a lot of time at the eatery telling stories of his world travels with his fiance. “I was shocked when I heard the news,” Reiter said in a telephone interview. “He did so many things that no one else could do. And I really respected him for that.”

The world of futures brokerages held him in equally high esteem. “Everybody liked the firm, it was well respected” before the recent revelations, John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy who has spent 17 years in the futures industry, said. “I don’t think anybody thought anything was untoward there.”

Wasendorf serves on an advisory committee of the National Futures Association, the self-regulatory group for futures brokers that has audit power over the firm and the same association that uncovered the missing funds during an on-site audit in Cedar Falls.

PFGBest was named the 30th best futures brokerage in 2008 by Futures Magazine. “Our reputation is built on well-established risk management practices and our attentive, respectful care of our customers and their accounts,” Wasendorf said in a statement regarding the ranking at the time.

Now, that image is crumbling. According to the person familiar with the US inquiry, the National Futures Association received phony responses vouching for bank balances when it sent confirmation requests to the Cedar Falls mailbox in 2010 and 2011. Peregrine typically had about $5 million in the account, another person said.

The weekend before Wasendorf’s suicide attempt, he granted the Futures Association permission to use a new electronic filing system that would let US Bancorp directly send statements to the industry self-regulator, cutting him out of the process, one person said. Patricia Campbell, a Peregrine spokeswoman in Chicago, didn’t return a telephone call for comment. Teri Charest, a US Bancorp spokeswoman, declined to comment, as did Larry Dykeman, a spokesman for the futures group.

Black eye on futures industry

The downfall of Peregrine is a second “black eye” on the futures industry after MF Global, CFTC Commissioner Scott O’Malia said last week as he called for an emergency meeting to decide whether company officials can be prosecuted. The risk for the industry related to Peregrine is losing the trust of a trader like Jacob Ursel, an 18-year-old investor in Calgary, Canada, who said he has $7,200 frozen in his Peregrine account.

“I still want to be in the industry, but I’m afraid the futures industry isn’t like other industries because not a lot of people try it because it’s risky,” he said in a telephone interview. Investors are “having trouble trusting the regulators because this happened twice in nine months,” he said, referring to MF Global, the futures broker run by former New Jersey governor Jon Corzine that filed for bankruptcy in October.

While Ursel’s frozen funds in Peregrine is “not hurting” him financially, not being able to get the cash for himself and his other investors has been difficult. After getting others excited to try futures trading, “it’s been tough telling them what happened,” he said.

Before Peregrine opened its office in Cedar Falls, Wasendorf would fly on his personal jet to and from Chicago, Cedar Falls Mayor Jon Crews recalled. In the past three years, Wasendorf has received two business awards from the town of 38,000. He is a member of the boards of the Greater Cedar Valley Alliance and the University of Northern Iowa Foundation.

“Everything looked perfect, so it’s a big surprise and it’s disappointing,” the mayor said in an interview at city hall. “It is not life-threatening for the community, but it’s going to hurt, no question about it. It’s a personal tragedy for his family, employees and investors.”

Stan Nielsen, 59, a manager of supplier contracts at 1-800-Flowers.com, said the revelations put Wasendorf’s philanthropy in a new light. “It’s really sad that he was giving away money that he didn’t have,” Nielsen said, mentioning Wasendorf’s $2 million donation to the University of Northern Iowa’s athletics department.

Amazing headquarters

Peregrine spent millions to construct the Cedar Falls headquarters, which are on One Peregrine Way and are hidden in woods behind a security gate. The complex, which includes child-care facilities, is adjacent to the Beaver Hills Country Club, where Wasendorf has a private parking spot with a name tag.

“It’s an amazing building,” Flynn, the former PFGBest analyst, said. “They had everything in there — food, a daycare centre. They have more baby beds than a baby hospital.” The facility was energy self-sufficient with its own green-energy production, he said.

Wasendorf “wanted it to be a great testament to his family and his business and the area,” Flynn said. Peregrine filed to liquidate in bankruptcy on July 10, listing assets of more than $500 million and debt exceeding $100 million in a Chapter 7 petition with the US Bankruptcy Court in Chicago.

Separately, US district judge Rebecca Pallmeyer issued an order freezing Peregrine’s assets at the CFTC’s request, saying it appeared there was “good cause” to believe the firm and Wasendorf violated the Commodity Exchange Act.

Only nine months after MF Global’s implosion, Peregrine’s troubles are casting attention on the CFTC, the US futures regulator. Senator Charles Grassley, an Iowa Republican, said the situation raises questions about the dual oversight of the industry by self-regulators and the CFTC.

“I want to know if the existing setup with the National Futures Association and the Commodity Futures Trading Commission is working to safeguard this marketplace,” Grassley said in a statement.

While lawmakers and regulators debate those issues, Cedar Falls residents are scratching their heads about the many sides of the man who set off this latest controversy. “He was a very well-respected businessman in the community,” Mike Hill, 54, a retired real estate broker, said. “It’s going to affect us. It’s detrimental.”

Nielsen, the manager at 1-800-Flowers.com, put it bluntly. “We always wondered how he got all this money,” he said.

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