Classic Case of Fraud in U.S. Regulatory Oversight. Futures Trader Trust is Gone.

PFG (Peregrine Financial Group) follows MFG (MF Global) into bankruptcy. MFG filed 6 months ago in December of 2011. Both companies were Commodity Futures Traders and both were regulated by the U.S. Commodity Futures Trading Commission (CFTC).

It seems like this is the logical and dispirited ending to every fraud: liquidation; and a very sad ending for the 10,000 – 25,000 creditors who will get nothing as a result of this liquidation proceeding.

MF Global, as you might recall, was John Corzine’s (former U. S. Senator, former New Jersey Governor, and former CEO of Goldman-Sachs) company about which he famously said, “I am stunned that we couldn’t find the money”, (hundreds of millions of dollars in client money mysteriously disappeared in the days before the firm’s collapse), and “I have no idea where it’s gone.” And, by the way, Mr. Corzine has not served any prison time nor has he been formally accused of or prosecuted for fraud.

MF Global filed for bankruptcy protection in December of 2011, becoming the first American financial casualty of the European debt crisis. The firm took a gamble in buying the troubled bonds of Italy, Portugal, Spain and Ireland last year, gambling (with other people’s money) that they would soon recover. Bad gamble. $1.6 billion in missing client cash has yet to be recovered by trustees overseeing the liquidation of the firm.

Peregrine Financial Group Inc., on Tuesday filed to liquidate under Chapter 7 of the U.S. bankruptcy code. Missing this time? Over $300 million in customers’ funds.

Russell Wasendorf Sr attempted suicide Monday, July 9. Wasendorf was found in his car with a note, the contents of which the sheriff declined to divulge. A hose ran from the vehicle’s exhaust pipe into the passenger compartment.

“A note was found in the vehicle that indicated possible discrepancies with accounts at Peregrine Financial Group,” according to the sheriff’s report.

Here’s where this story gets interesting: It turns out that Russell Wasendorf Sr. intercepted and forged bank documents for more than two years to cover up hundreds of millions of dollars in missing money, a person close to the situation testified for the record.

Once Wasendorf realized he was caught, and knew the implications of his actions would be exposed for the whole world to see, he tried to commit suicide, and failed. And while crime happens all the time, what is truly stunning is that the CFTC gave the firm a clean bill of health in its January inspection of Peregrine Financial Group. That’s 6 months ago. The CFTC, as a reminder, was it regulator. The entity, whose sole charge is to make sure that firms at least have real, not rehypothecated, cash in their segregated client bank accounts. PFG failed to do so for at least the past two years. And somehow, the CFTC missed this. MF Global was a warning shot, and the CFTC missed it entirely. And not only that, 2 months later, it pronounced PFG clean.

Gary S. Gensler is the chairman of the CFTC.

Gensler was Undersecretary of the Treasury (1999-2001) and Assistant Secretary of the Treasury (1997-1999) in the United States. Barack Obama selected him to lead the Commodity Futures Trading Commission, which has jurisdiction over $5 trillion in trades. Gensler was sworn in on May 26, 2009.

In March 2009, Senator Bernie Sanders (I-VT) attempted to block his nomination to head the Commodity Futures Trading Commission. A statement from Sanders’ office said that Gensler “had worked with Sen. Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of AIG and has resulted in the largest taxpayer bailout in US history.” He also accused Gensler of working to deregulate electronic energy trading, which led to the downfall of Enron, and supporting the Gramm-Leach-Bliley Act, which allowed American banks to become “too big to fail.”

In early November, 2011, Gensler stepped aside from the CFTC’s investigation of the giant derivatives broker MF Global because of his longstanding ties to Jon Corzine, the CEO of MF Global, for whom Gensler had worked while both were at Goldman Sachs.

For the PFG fiasco, and for the failure to adequately investigate MF Global, Gensler has to be fired immediately, with prejudice, and never allowed to serve anywhere in the U.S. government again. Unfortunately, this is only the tip of the iceberg as we will see during the rest of 2012 and all of 2013. 

About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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