This story originally appeared in the Des Moines Register.
DONNELLE ELLER AND VICTOR EPSTEIN
CEDAR FALLS, IA. — The FBI has launched an investigation into an investment firm here accused by two regulatory agencies Tuesday of misappropriating at least $200 million in client funds.
Peregrine Financial Group and its founder, Russell Wasendorf Sr., “have used customer funds for purposes other than those intended by its customers,” according to a complaint filed by the U.S. Commodity Futures Trading Commission. The agency said the company has misled regulators for nearly two years, and the money remains missing.
The commission also accused Peregrine of violating customer fund segregation laws and including false information in financial statements filed with the commission.
The onslaught of troubling news began with reports that Wasendorf, the company’s CEO and a respected Cedar Falls business leader and philanthropist, attempted suicide early Monday morning near the company’s headquarters.
The allegations — combined with MF Global’s nearly $2 billion collapse last year — are prompting investors, market watchers and federal lawmakers to question the strength of U.S. regulations overseeing commodities futures trading.
“Regulations are only as good as the regulators,” said John Roe, co-founder of the Commodity Customer Coalition, a nonprofit group set up in the wake of the MF Global fallout. “We have a complicated regulatory scheme set up now to oversee commodities futures trading. But it’s very clear they can be subverted by the simplest measures imaginable, like falsifying a bank report.”
Roe said it could take months, possibly years, for Peregrine clients to recover their money. The company most likely will be placed in receivership and be looking at bankruptcy, he said. A court document says the company had 1,845 investors.
Company’s clients express dismay
Peregrine customer Kevin Davey said the allegations, if true, violate a bedrock principle of futures trading. Traders are confident in their brokerages because they believe that nobody will touch the money in customer accounts.
“The whole industry is based on that,” Davey said.
Peregrine helped customers buy, sell and trade foreign currency, futures and options — investments whose value changes based on the expected future price of food and energy commodities and other investments.
The extent of the dismay and frustration reverberating throughout the financial community was echoed Tuesday in a letter from a Peregrine investor, Chicago-based Attain Capital Management, to its customers.
“MF Global had us angry, but this time, it’s personal,” the letter stated. “We were misled by senior leadership whom we trusted in business. We were let down by regulators. We were failed by our government.”
Attain spokeswoman Lauren Nelson said Attain had worked for several years with Peregrine and had “a fair amount of business” with the company.
“Ahead of the situation, we were given multiple reassurances from senior management that the firm was in good financial health and that they were in compliance,” she said. “We had no indication that anything like this was about to occur. And the most disturbing component in all of this is how badly the regulators dropped the ball in the situation.”
Nelson said her company’s clients are “families, individuals, people who have invested under the promise” of protection of U.S. regulations. Nelson said the company would work to make investors whole.
Firm’s founder was community leader
An FBI official confirmed it had launched an inquiry into Peregrine on Monday, but declined to comment further on Tuesday.
Wasendorf on Monday had been reported in critical condition at University of Iowa Hospitals. A hospital official declined on Tuesday to provide any additional information, citing federal medical privacy laws.
Black Hawk County Sheriff Tony Thompson said Wasendorf, 64, attempted to asphyxiate himself in his car, parked near Peregrine headquarters, about 8 a.m. Monday. An employee discovered Wasendorf unconscious inside, with a hose connected to the running vehicle’s tailpipe.
Officers found a suicide note referencing improprieties “significant enough for us to contact federal authorities,” he said.
In Cedar Falls, Mayor Jon Crews said that Wasendorf has been a leader in the community of 39,260 and that he and his family have been prominent and popular. Peregrine also is a key employer in the region’s agriculture-oriented economy.
“The city spends a lot of time trying to find good jobs and bring them here, and this is a setback to those efforts,” Crews said. “While we’re aware of the gravity of the charges against him, we remain very concerned about both the Wasendorf family and the people in Cedar Falls who work” at Peregrine.
“Their lives and their families’ lives are tied into this business,” he said.
Company fined earlier this year
Also Tuesday, U.S. Sen. Chuck Grassley questioned whether the industry’s oversight was effective. He said problems like those at Peregrine and MF Global can hurt Iowa farmers, grain cooperatives and brokers.
Said Grassley: “From a systemic standpoint, the question is whether there is effective oversight in our commodity trading system.
“People need to have confidence in our commodity trading system in order for it to work for farmers and investors the way it’s intended. I want to know if the existing setup … is working to safeguard this marketplace.”
Iowa Agriculture Department spokesman Dustin Vande Hoef said Tuesday that he was not aware of any Iowa grain elevator or related businesses that might have had money invested with Peregrine.
Peregrine has been in trouble before.
The National Futures Association fined the company $700,000 in February for failing to properly supervise four brokers who “made trade recommendations that maximized commissions without regard for the best interests of their customers” and engaged in deceptive sales solicitations.
Peregrine has also been accused in a lawsuit of allowing Chicago-based futures broker Trevor Cook, convicted last month of running a Minnesota Ponzi scheme, to transfer millions of dollars into its accounts. The lawsuit claimed that Peregrine failed to spot “overwhelming red flags of fraud and insolvency.”
More than 700 investors were bilked out of $194 million, according to receiver R.J. Zayed, who is trying to recover funds for the victims. Zayed sued Peregrine, which served as a commission merchant in Cook’s currency trades from 2005 to 2009, for $48 million in February.
Register staff writer Dan Piller and the Associated Press contributed to this story.