INsider: PFGBest debacle worst nightmare for client

The calls started coming in yesterday afternoon around 2:00 for Lauren Nelson, communications director for Attain Capital Management LLC, a small introducing broker specializing in managed futures. Friends and industry members wanted to know if she'd heard about the problems surfacing at Peregrine Financial Group, the non-clearing futures commission merchant put on ice yesterday by the National Futures Association. Had she heard reports that the brokerage's boss, Russell Wasendorf Sr., had attempted to commit suicide? “It didn't seem believable to us at the time, but we got the email from Peregrine at 3:09,” said Ms. Nelson, whose firm uses Peregrine — commonly referred to as PFGBest — for a “fair amount of their business.” The email gave her a sinking feeling. “Due to a recent emergency involving Russell R. Wassendorf Sr, a suicide attempt, some accounting regularities are being investigated regarding company accounts…Until further notice, PFGBEST is not authorized to release any funds.” A press release later in the day from the NFA, which is responsible for monitoring such firms, confirmed that PFGBest had been given a liquidation order, preventing clients from any trading other than to liquidate their positions. Ms. Nelson said advisers at the firm were initially given discretion as to whether they would close out client positions at PFGBest. But when Jefferies & Company Inc. announced last night that it was raising margin requirements for PFG clients, Attain starting working to transfer accounts to other FCMs. Less than a year since the MF Global meltdown, it appears another futures clearing merchant has hit the wall. While much smaller than MF Global, PFG appears to be in an even more precarious situation. The NFA said in its release that the SRO “has reason to believe that PFG does not have sufficient assets to meet its obligations to its customers.” The U.S. Commodity Futures Trading Commission announced on Tuesday that it has also filed a complaint against the company, alleging similar charges. Ms. Nelson said that the firm is rumored to be short between $200 million and $250 million in customer funds. PFG only had about $400 million in total customer assets. Information released by the NFA suggested that contrary to bank confirmations it was given in 2010 and again last year, PFG did not have more than $200 million in cash in the bank account, but in fact had less than $10 million at both those times. “With the confirmation process and the infrastructure in place, we have no idea how the NFA could have missed this for two years running,” said Ms. Nelson. “We have a lot of anger and frustration over this right now.” Patricia Campbell, a spokeswoman for PFGBest, did not return calls seeking comment. NFA spokesman Larry Dyekman did not return a call for comment. Futures customers are not covered by the Securities Investor Protection Corporation fund. If the rumors about missing customer funds at PFG are accurate, clients of the firm could face significantly bigger losses than those at MF Global have. MF Global clients have so far received more than 80% of their assets back from the firm. “I hope this serves as a wake-up call for the industry, for regulators, and for Congress that steps need to be taken to protect customers,” said Ms. Nelson.