This article originally appeared in the Des Moines Register.

Written by
Victor Epstein

Victims of the financial scandal at Peregrine Financial Group may finally get some good news, thanks to the possible existence of shell accounts at the defunct futures and commodities brokerage.

The fakes could reduce the number of real victims seeking a piece of the remaining funds, thereby increasing potential payouts. Peregrine had 24,000 customer accounts when it filed for bankruptcy on July 10, one day after owner Russell Wasendorf Sr.’s botched suicide attempt.

“In a weird way, it gives me a shred of hope that the outcome will be better than what many are fearing,” said Carley Garner, a senior strategist at DeCarley Trading LLC. The Las Vegas-based brokerage had more than $2.5 million in the Peregrine system when its accounts were frozen by regulators.

Want more context? Read previous Peregrine Financial stories.

Wasendorf left suicide notes outlining how he had stolen customer funds and lied to regulators for 20 years. He pleaded guilty on Sept. 17 to mail fraud, embezzlement of customer funds and lying to regulators. The 64-year-old admitted stealing more than $100 million from customers, and faces a maximum prison sentence of 50 years.

Regulators have placed the size of the theft from Peregrine’s segregated customer accounts as high as $220 million, but a defense attorney for Wasendorf said the true amount may be much lower, noting that the former CEO is willing to help the government locate missing funds. Financial experts say the shell accounts could represent some of the difference.

“It would mean that there would be fewer customers dividing the remaining assets so the legitimate customers’ pro rata share would increase,” said Daniel Roth, head of the National Futures Association, which served as Peregrine’s first-line regulator.

John Roe of the Commodity Customer Coalition said Wasendorf had the authority to create the dummy accounts at Peregrine, which also operated under the PFGBest name. The coalition was formed as an advocate for investors after $1.6 billion disappeared from segregated customer accounts at MF Global in 2011.

The accounts are called segregated because the firms handling them are not allowed to divert them to other uses or mix them with their own funds.

Wasendorf could have made fake deposits into the Peregrine shells and withdrawn real money, Roe said. He could then have used the stolen funds to buy hard assets, like the firm’s $24 million headquarters in Cedar Falls, which could have helped him meet his capital requirement as a futures commission merchant, Roe said.

“The advantages from opening a shell account would most likely have been for an illegal purpose,” said Michael Sherzan, CEO of Broker Dealer Financial Services Corp. in West Des Moines.

Futures commission merchants serve as intermediaries between markets and brokers and are authorized to hold customer accounts. They receive a commission for every trade they help place, but the volume of money they can handle is limited by the size of their own capital. Wasendorf bemoaned the need to meet those requirements and acknowledged diverting funds for that purpose in suicide notes that railed against “mean-spirited” regulators.

“If you take $100 million off the amount you had in the segregated customer accounts (for the shells), the amounts legitimate customers get back could go up from 30 percent to 50 percent,” Roe said.

Bankruptcy Trustee Ira Bodenstein has been authorized to make an interim distribution of $123 million to legitimate customers from the remaining money at Peregrine.

“It is possible that some of the individual accounts on the books at PFGBest might have been shell accounts used to funnel away client money, and if that were the case, it would be entirely plausible that the total assets the firm reported as under their control would be substantially lower,” said a blog on the website of Attain Capital Management in Chicago, which had about half of its assets with Peregrine.

The trustee is delaying payouts to accounts that were inactive in the months leading up to the July 10 bankruptcy filing, and he is comparing taxpayer IDs with an Internal Revenue Service database to verify that the names on the accounts correspond with real people. Bodenstein declined to say how many accounts might be fakes, but he did not deny their existence.

“At the end of the day there could be accounts with something that comes up during screening,” Bodenstein said.